Insuring Against Loss of Income: Why It’s Important
If you have a mortgage, run a small business, or are self-employed without sick leave, protecting your income from unexpected illness or injury is critical. This is where income protection insurance comes in.
What is Income Protection Insurance?
Income protection insurance allows you to receive up to 70% of your income for a specified period if you’re unable to work due to illness or injury. This ensures you can keep up with your financial obligations while focusing on recovery.
The most common claims are for illnesses such as cancer, heart attack, anxiety, and depression. Payments usually last between two and five years, although some policies allow you to receive payments up to a certain age, such as 65. The amount paid is based on 70% of your income in the 12 months leading up to the illness or injury.
Does Your Super Include Income Protection?
In some cases, income protection insurance may be part of your superannuation, but more commonly, your super only covers life insurance or total and permanent disability (TPD) cover. If your super does include income protection, make sure to check the extent of the automatic cover as it can be quite modest.
If you find your super cover is insufficient, you can always take out an income protection policy outside of super. The good news? Premiums for income protection insurance are tax-deductible, unlike other types of life insurance such as trauma insurance.
How to Work Out Your Budget for Income Protection
Before deciding on a policy, it’s important to work out a budget. Consider how much you’d need to maintain your lifestyle if you were unable to work. From there, you can determine the right level of income protection and tailor other factors such as:
- How quickly you need payments to start
- How long the payments will last
Many people assume income protection insurance is expensive, but you can adjust the policy to suit your budget. For instance, reducing the percentage of income covered, lengthening the waiting period before payments start, or shortening the payment duration can help lower your premiums.
Check the Policy Details Carefully
Understanding the fine print of your policy is essential to ensure your claim is successful if the time comes. Every insurer has different definitions of what triggers a payment, so be sure to know the difference between “own occupation” and “any occupation.”
For example, if you’re a surgeon and lose the use of your hands, you would receive a payout with an “own occupation” policy because you can no longer work in your specific job. But if you have an “any occupation” policy, your insurer may argue that you can still work in another role, such as a general doctor, and your claim could be denied.
Also, check if your policy asks for your medical history. If it doesn’t, there could be limitations on which illnesses are covered.
Stepped vs Level Premiums
Another consideration is whether your policy has stepped premiums or level premiums:
- Stepped premiums start low but increase as you age.
- Level premiums start higher but stay consistent, which could be cheaper in the long run.
Most income protection policies require that you work at least 20 hours per week, and policies are generally only available to individuals under the age of 60. If you receive a payout, remember to declare this as taxable income on your tax return.
Need Help Reviewing Your Cover?
If you’re unsure whether your current income protection insurance is enough to safeguard you and your family, give us a call to discuss your options. We can help make sure you have the right level of protection in place.
References:
- Income protection insurance | Moneysmart
- The Most Common TPD Claims in Australia
- ATO Community – Trauma Insurance and Income Tax
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