Stay financially fit: How Income Protection insurance can help

5-minute read

Income Protection insurance emerges as a potential safeguard, offering a valuable safety net that can provide a partial replacement of lost income in the event that the insured individual is unable to earn due to illness or injury. Discover how Income Protection insurance can contribute to maintaining financial well-being.

The basics of income protection insurance

Income Protection insurance works by providing a replacement income when the insured individual is unable to generate earnings due to injury or illness. Typically, these benefits are dispensed in the form of monthly payments, representing a proportion of the individual's pre-disability income. The exact percentage of pre-disability income covered as a monthly benefit differs depending on the policy, but most Income Protection policies generally offer up to 70% coverage. 

The assessment of the monthly benefit at the time of a claim is determined by factors such as the lesser amount insured and a percentage of the individual's income during the claim period. Depending on the specific Income Protection policy and/or insurer, there might also be provisions for a contribution to superannuation in addition to the benefit paid directly to the insured.

The monthly benefit is usually paid after a specified waiting period, depending on the policy, with waiting periods often being 30, 60 or 90 days. The benefit is continued to be paid monthly until the insured reaches the policy's maximum benefit period, which may be anything from 2 to 5 years or up to age 65.

Benefits of income protection during illness or injury

Income protection insurance offers a fundamental benefit by helping to ensure that the policyholder receives a percentage of their pre-tax income in the event of illness or injury. In situations where earning an income becomes impossible, the policy can step in to provide financial support for daily expenses. The following outlines the primary benefits of Income Protection insurance.

Income protection can be customised

Income protection insurance provides the opportunity to customise the level of protection according to the individual's specific circumstances. This flexibility allows for customisation in various ways, such as:

Waiting period

Premiums for Income Protection insurance may vary based on the selected waiting period. The waiting period refers to the agreed-upon duration after experiencing a disabling injury or illness during which the insured individual must be unable to work before becoming eligible to make a claim and receive benefits. Typically, opting for shorter waiting periods, like 30 days, will result in higher premiums compared to selecting longer waiting periods, such as 90 days or more.

Benefit period

The Benefit Period represents the maximum duration during which the insured individual is eligible to receive benefits. Typically, opting for an extended benefit period will incur higher costs compared to selecting a shorter benefit period.

Stepped or Level premiums

Premiums are not fixed and can increase. There are two types of premium options - Stepped and Level. Stepped premiums are based on the insured’s age and generally increase at the policy anniversary date each year. Level premiums have the cost of increases associated with age spread over several years and are based on the insured’s age at the policy start date. This means the costs start out higher than Stepped premiums, but depending on how long the policy is held for, the cost may be lower at some point in the future. Both types of premiums may also increase if the insurer adjusts its premiums due to market conditions or other factors that may affect the policy including discounts or adjustments for inflation (CPI). 

It's best to compare life insurance policies across various providers to identify the most suitable option based on individual circumstances.

Income protection premiums may be tax deductible

Typically, premiums for Income Protection insurance—especially when a regular benefit is disbursed and the policy is not within the superannuation framework—are usually eligible for tax deductions, enhancing its cost-effectiveness. To ascertain eligibility criteria, it is recommended to consult with an accountant or verify with the Australian Taxation Office (ATO).

Less reliance on savings

In the absence of Income Protection insurance, individuals may have to depend on their savings to meet expenses during a period of incapacity and diminished earnings. Adequate coverage under this insurance can play a crucial role in preserving existing savings if the cover is sufficient to manage ongoing expenses.

Regular reviews and adjustments

Regularly reassessing income protection policies is crucial to ensuring their continued relevance to individual circumstances. As life situations evolve, policies should adapt accordingly, incorporating modifications to elements such as the waiting period, benefit period, and insured amount to align with changes in one's financial situation.

The differences between other types of life insurance and income protection

Income Protection insurance is designed to substitute a part of an individual's income through monthly payments if the insured is incapable of working due to illness or injury. In contrast, the payout triggers for other life insurance types might include scenarios such as death, total and permanent disability (TPD) resulting from illness or injury, the loss of capacity to work either in one's own or any occupation, or a diagnosis of a specified critical illness or medical condition (referred to as Critical Illness or Trauma).

While Income Protection policies allow customisation through the selection of varied waiting periods, benefit periods, and coverage amounts, alternative life insurance forms are structured to deliver a lump sum benefit—a fixed amount—for a specific event or condition. This format provides less flexibility for tailoring the utilisation of the benefit.

The emphasis on life insurance coverage varies according to the specific type of life insurance. Life insurance offers coverage for beneficiaries in the event of the insured individual's death. Critical Illness (or trauma cover) is structured to offer financial assistance following a diagnosis of a specified critical illness or medical condition. TPD insurance primarily addresses cases where the insured person experiences permanent disability, rendering them unable to work.

It is important to view the relevant Product Disclosure Statement when considering Income Protection insurance.  Find out more by visiting the TAL website.

Is there value in income protection insurance?

Income protection insurance provides a monthly payout which can help support financial well-being and peace of mind when the insured individual cannot generate income. Whether the earnings come from self-employment or working with a company, Income Protection insurance can play an important role in protecting one's financial future and constitutes a vital element of a comprehensive financial strategy. 

By understanding the basics of Income Protection insurance, an informed decision can be made to ensure that one’s ability to provide an income remains secure, even in challenging times.