Who is Suited for Income Protection Cover?

You can usually apply for Income Protection insurance if you are between 18 and 59 and an Australian resident. With an Income Protection insurance policy you can choose the length of time you want to be covered for, and the amount of cover you will need to meet your monthly expenses. You may choose to be insured for just the essentials, or pay slightly higher premiums for a higher level of cover to pay benefits for extra living expenses. The most common type of Income Protection insurance will pay up to 75% of your income if you are unable to work due to an accident or illness and you can then choose how long you want these benefits to be paid, from 2 years up to age 65.

If you have a partner, a family or a relative relying on you and your income then you need to consider an Income Protection insurance policy because if you are unable to take care of them you want to make sure the trauma of the situation doesn’t extend to your finances. Plus, the premiums you pay for Income Protection insurance are often fully tax deductible so you are not only protecting yourself and your family, you’re saving money at tax time too.

Compare Different Types of Income Protection Insurance

Income protection insurance can be a very broad term, just as accident or injury can apply to any number of circumstances, which is why you need to know what income protection insurance really applies to, and make sure you know what you need from your policy because each contract’s fine print can be different.

Income protection insurance can also be known as income replacement insurance, which can often be a misnomer if you are only being paid out 75% of your previous income. Income protection insurance used with superannuation funds can often be called salary continuance insurance, and depending on the extent of your coverage, you may be covered under disability income insurance for more permanent financial support.

To help you determine the type of income protection you may need, you’ll need to understand the different disabilities which are covered in insurance contracts. You will probably see one of three definitions of disability, so make sure you understand each one before you sign:

• Duties based disability. This is classed as when you are unable to perform one or more important duties in your role at work because of illness or injury. These duties could include manual work, supervision, desk work, meeting with clients or presentations.
• Income based definition. Is when you have suffered a reduction in your income because of an accident or sickness.
• Hours based disability. Means you are unable to perform your work duties for a certain number of hours per week, for example 10 hours per week, because of sickness or an accident.

How Much Income Protection is Enough?

As you can now see, there are a number of conditions and exemptions which could affect how you are paid your income protection benefits, but with the help of these guides you can watch out for the fine print tricks.

In most cases if you are employed and earn a wage, 75% of your gross salary amount, including fringe benefits packages and superannuation contributions from your employer will be enough income protection insurance. If you are self employed, you should look at insuring your income for 75% of the income generated by the business as a direct result of your efforts, less business expenses. At the same time, you may find your income protection insurance percentage if limited if you earn over a certain amount, $250,000 per year for example and there are often limits to the maximum level of benefits.

How are the Premiums Calculated?

Income protection insurance premiums are calculated based on the level of cover you require, as well as:

• Your age, as premiums can increase as you get older, alternatively your cover can decrease as you get older so your premiums remain the same.
• Your gender.
• Your health, any pre-existing conditions and whether you smoke.
• Your occupation and how dangerous it is perceived to be.
• How long you elect to wait before you receive your income protection payments, as this can depend on entitlements you receive through your employer.

While there are many variables when it comes to calculating income protection insurance premiums, typically a year’s worth of premiums will be equivalent to one week’s salary. This is a small amount to pay, to know you are covered to maintain your income and way of life.

Tips to Compare Income Protection Insurance Policies

Protecting your income is a serious business and you want to make sure the policy you are paying for is going to protect you in the way you need, if you need it to. Therefore, make sure you ask your insurer a few key questions when comparing policies, such as:

• What is and isn’t covered?
• How much will be paid after a claim?
• Exactly how much will the premiums be now?
• Will the premiums go up in the future, and by how much?

There are features and benefits that we can discuss with you to ensure that you have the best comprehensive policy that suits your needs and budget and some include:

• Having indexed linked premiums this means your premiums and your cover will keep up with inflation so your policy is still good value, and covers you for the money you will need in the future.
• Know the waiting period This is the period of time you have to be unable to work before your insurance policy comes into effect. This could be as little as seven days or as long as two years and shorter waiting periods incur higher premiums.
• Know the benefit period This is the amount of time you will receive benefits from your insurance and could be from two years up to five years, or until you reach a certain age such as 65 years or 75 years. Other policies can cover you for lifetime income protection, however, longer periods mean higher premiums.
• Covered for death If you die, your income protection insurance policy can pay a multiple of your monthly insured income to your dependents.
• Needle stick coverage If you are a health care professional you will want to make sure needle sticks are covered if you become infected with HIV or certain types of Hepatitis while at work.
• Continuing superannuation contributions Normally when you are off work your super contributions will stop, however, your income protection insurance can make sure payments are still made.

Are You Covered by Workcover?

Workcover is a nationwide initiative where all employers pay the government a premium in case one of their employees is injured at work. The employer can then make a claim and Workcover will payout compensation and other benefits – but only if the injury occurred at work.

While all Australian employees are covered under Workcover, that doesn’t make income protection insurance obsolete. Workcover should only be viewed as a minimum insurance cover, as potential benefits are not always guaranteed as Workcover covers:

• Accidents or injuries which occur at work.
• A lump sum payment or regular repayments, with the power to withhold payments until the level of your disability is determined.
• You may not receive payment benefits when you are first injured which can be when you need them the most to cover medical bills, mortgage repayments and other immediate expenses.

Pros and Cons of Income Protection Through Your Super

You may also notice that there is an allowance of income protection insurance included in your superannuation account, as super funds have been providing Australians with a minimum default amount of insurance for many years as a safety net for you. However, before you stop your search for income protection insurance because you think you are covered through your super, you need to carefully look at what your particular super fund offers you in the way of insurance, and whether that matches to your family’s needs in the event of your illness or injury.

While there can be benefits to utilising the income protection which comes with your super, you should be aware of some of the drawbacks and limitations which could catch you out:

• Complex claims process. If you need to make a claim on your income protection insurance which is held through your super, you not only need to satisfy the insurer of the legitimacy of your claim, but also the trustee of your super fund. This is because you are not paid the benefit directly, instead the insurance benefit amount is paid to the trustee and you then have to meet a condition of release to receive the funds.
• Terms and conditions. When you’re choosing a super fund you’re already doing a lot of research and making a lot of comparisons, so if your fund comes with income protection insurance it can be tempting to leave your investigations at that. However, it is important to look at the terms and conditions of the insurance policy included too, as some policies will only pay benefits for a period of two years, when you may be better off receiving benefits until you are 65 and can revert to living on your retirement funds.
• Continue private cover. If you choose to change super funds for any reason, you will need to check whether you can continue your income protection insurance in a private capacity. You will want to continue with your insurance cover, because if you have to reapply, you will be older and may be considered a higher risk, and will therefore have to pay higher premiums.
• Your retirement can be funding your insurance. It may seem cost effective to pay for your income protection insurance through your super fund, because you don’t miss the premiums coming out of your income. However, the premiums can be coming out of your income insurance, as some super funds will use your retirement funds to pay your insurance premiums. Therefore, you are protected in your working life, but your nest egg for retirement is being reduced without you even realising. Making the minimum contributions to super isn’t enough for most people to fund the kind of life they want in retirement anyway, so imagine how much your lifestyle is going to be reduced when not even nine percent is being contributed.

Of course there are some important benefits to consider when looking at the option of income protection through your super:

• The big guys are behind you. When you make an insurance claim it can feel like you’re one tiny individual against a giant company, however, when you make a claim through your super, you are backed by the superannuation fund acting on your behalf.
• Income insurance is cheaper through super. When your super fund protects you with income insurance, it is doing so through a group policy. This means that because they are accessing wholesale rates, the insurance is cheaper because you are not assessed on your individual circumstances and risk factors.
• Automatic acceptance. As a group policy, you are not required to answer any questions or take a medical exam. Even if you are a smoker you will pay the same rate as a non smoker. Under automatic acceptance you can be insured for as much as $20,000 a month.
• Unrestricted occupations. If you work in a particularly risky job, you may find that some insurers won’t want to cover you, however, with the group cover through your superannuation, there is no restriction on occupations.
• You may not have cover anyway. While income protection insurance through your super fund does come with some restrictions, very few Australians have any sort of income protection anyway. Therefore, being covered through your super gives you protection without you having to even think, remember or research it. This can be of particular advantage to young singles or couples, who don’t bother with income protection insurance because they think they are invincible and they don’t have dependents anyway. However, you are forgetting that your biggest asset is your ability to earn an income, and that should be protected.
• Cost effective premium payments. When you pay for your income insurance through your super you are doing so with your contributions which have been taxed at the super contribution rate of 15 percent. However, if you take out a separate policy and pay for the premiums with your post tax earnings, you could have been taxed at a rate as high as 45 percent.

Income protection insurance is a type of coverage which is as individual as you are. There is no one who can do your job quite like you and there is no one who can look after your family quite like you do, so to choose the best income protection for you and your family, you need to look at what you’re doing now, and how you can preserve that into the future.

However, with income protection insurance you can tailor your policy to pay out an amount which matches your expenses, at a time when you and your family will need it most. Income protection insurance will also cover you if you get sick, not just injured and sickness is actually the major cause of income protection claims, accounting for around 80% of claims. Your income protection insurance can also cover you with inclusive benefits, as well as inclusive cover for no matter where or how you become disabled.

Income Protection Insurance FAQ

What is Income Protection?

• The insurer pays you an income while you cannot work if you are sick or injured.

How Much do you get?

• Policies will usually pay out up to 75% of your normal gross income.

Tax Deductible

• For an individual, Income protection insurance is tax deductible and the benefits when paid are considered taxable income.

When will you be paid?

• Waiting periods (The time you must be unable to work before you start receiving payout income) range from 14 days to two years, the shorter the waiting period, the higher the premium. The cause of your sickness or injury does not need to be work-related.

Age

• Generally speaking, the older you are, the more likely you are to suffer illness, therefore the premium you pay will be higher; smoking is also seen as an added level of risk and usually sees your premium rise.

Occupation

• A manual or blue-collar worker such as a miner might be required to pay a higher premium compared to an office worker, who is considered less risky.

Benefit Period

• The maximum length of time your policy will pay your income if you are unable to work. Typical benefit periods are two years, five years or ‘to age 65′, and the longer the benefit period, the higher the premium.

Serious accidents and illness can happen to the best of us, and rather than wrapping yourself in cotton wool and never having any fun in your life, the best thing you can do is to insure yourself with Income Protection insurance. While Income Protection insurance can’t stop you having an illness or accident, it can stop that event becoming a major financial disaster, because not only are there going to be medical and doctors’ bills you will need to pay after a serious illness or accident, it may also be some time before you can return to full time work and be earning your normal income.

That is why Income Protection insurance is a must-have for anyone who is a breadwinner in the family because you can be covered for accidental death or dismemberment if you are injured outside of work.

While we may not always like going to work, we do so because we know how important our income is to maintaining a quality of life for ourselves and our families. However, what if you were unable to work and bring home an income – how would you look after your family then? The good news is that even if you become sick or injured and can’t work, you can still provide for your family if you have income protection insurance.

Salary protection insurance can take just minutes to apply for, but can go on protecting your family for as long as you are unable to work. With something so simple to organise and which can offer such peace of mind, spend a few minutes now to find out exactly how income protection insurance can protect you and your family, and how to make the comparison and application process as fast and easy as possible.