Stay financially fit: How Income Protection insurance can help

5-minute read

Income Protection insurance is a valuable safety net that may provide the ability to receive a portion of lost income if the person insured is unable to earn an income due to illness or injury. Here’s how Income Protection insurance can support financial fitness.

Income Protection insurance basics

Income Protection insurance works by providing an income replacement payment when the person insured is unable to earn an income due to injury or illness. Benefits are usually paid as monthly payments representing a portion of pre-disability income. The portion of pre-disability income paid as a monthly benefit will depend on the pre-disability earnings, with most Income Protection policies typically paying a benefit of up to 70%. 

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 Income Protection policy and/or insurer, the policy may include a contribution to superannuation as well as the benefit paid 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

insurance offers a fundamental benefit by ensuring 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

Income Protection insurance premiums can change depending on the waiting period selected. The waiting period is the agreed amount of time after suffering from a disabling injury or illness that the person insured must be unable to work and wait before being eligible to make a claim and receive a benefit. Short waiting periods (for example, 30 days) will generally have a higher premium applied than a longer waiting period (for example, 90 days or longer).

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

Premiums on Income Protection insurance, where a recurring benefit is paid and when the policy is held outside of the superannuation environment, are generally tax deductible, which can make it a cost-effective option. Check this with an accountant or the ATO to ensure the eligibility criteria.

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 income protection and other types of life insurance

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 focus on life insurance coverage also changes depending on the type of life insurance. Life insurance provides coverage for beneficiaries when the insured passes away. Critical Illness (or trauma cover) is designed to provide financial support when the insured has been diagnosed with a specified Critical Illness or medical condition. TPD insurance primarily addresses situations where the insured is permanently disabled and 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.

The value of income protection insurance

Income protection insurance offers a monthly payout that can 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.