How Income Protection Insurance Can Safeguard Your Lifestyle During Illness or Injury
Research commissioned by TAL in 2019 indicates that only approximately half of all Australians have some form of life insurance policy, with many remaining under-insured. As per the ATO, while the number of active life insurance policies is twice the number of working-aged Australians, this does not signify that most Australians have adequate insurance coverage. In fact, despite the significance of active policies, only about 52% of Australians hold some form of life insurance.
If you are considering the importance of income protection insurance, consider this scenario: You unexpectedly injure your back and require time to recover. Without income protection insurance, you are left without a paycheck during your recovery. Bills begin to pile up, and your savings rapidly deplete. Suddenly, you are juggling both health and financial stress. Income protection could have helped maintain financial stability while you focused on recuperating.
What Does Income Protection Insurance Cover?
Sometimes called a salary continuance insurance, income protection insurance is designed to provide you with a stream of continuance income if you can’t work for an extended period of time due an unexpected illness or injury.
Income protection insurance commonly provides a monthly benefit, a predetermined percentage of your pre-tax income, to assist with essential living costs while you recover. Depending on the specific policy, income protection policies can offer up to 70% of your pre-tax income during your claim.
Each policy has its own definition of partial or total disability that must be met before a claim can be submitted. It is important to review your insurer's website or product disclosure statement (PDS) before committing to an income protection policy to guarantee that you obtain the desired coverage. Do not hesitate to consult with an insurance broker to explore the available options before making an investment.
What Is Excluded from Income Protection Insurance?
Depending on the type of policy you undertake, exclusions vary. However, some common exclusions include:
- Self-inflicted injuries
- Attempted suicide
- Drug usage
- Participation in illegal activities
- Pregnancy
However, these exclusions differ among providers. Some policies may have a narrower definition of exclusions, while others may be more extensive. It is always important to review the complete details of your policy before making an investment or filing a claim.
Contemplating if You Need Income Protection Insurance?
If you are self-employed, have dependents, or have debt, investing in an income protection insurance policy is a prudent choice.
Your insurer will typically require details such as your age, occupation, current income, medical history, lifestyle habits, and participation in high-risk hobbies to determine (a) their willingness to insure you, (b) the cost of your premiums, and (c) specific terms and conditions attached to your policy.
Generally, an indemnity policy will apply for new contracts after November 2021 as follows:
- An indemnity value policy, which insures you for a percentage of your salary at the time you make a claim. If your salary has decreased when you make the claim, you will receive a smaller monthly insurance payout.
Additionally, there is the option of choosing between stepped or level premiums.
- Stepped premiums are calculated based on your age. The cost of coverage is lower if you sign up when you are younger and increases as you age.
- Level premiums tend to be higher at the beginning of the policy, but changes to the cost are not based on your age, so changes are less significant over time.
It is important to consider your options carefully before making a decision. Making an incorrect decision or providing misleading information can impact your coverage.
Injured or Unwell? Income Protection Keeps You Covered
If unforeseen circumstances necessitate financial protection, regular benefit payments can alleviate some of the burden during your recovery. Additional benefits and considerations for investing in an income protection insurance policy include:
- Most policies offer a rehabilitation benefit (outside of super), collaborating with your medical practitioner to ensure you receive the optimal treatment.
- Most policies offer a recurrent disability benefit, eliminating the need for subsequent waiting periods.
- Some policies offer a death benefit, payable to your beneficiary in the event of your untimely demise while your policy remains active.
- Tax deductibility, enabling you to claim them during your tax return period.
Should you require dependable income protection insurance, consider collaborating with one of our specialist brokers at Morgan Insurance Brokers to select a plan tailored to your requirements.
Be prepared for unforeseen events. Contact us today.
Benefits of Income Protection Insurance for Self-Employed Individuals
As a self-employed individual, you make up your entire business. You are the source of your livelihood. But have you ever wondered what would happen if you were to suddenly fall ill or get injured, impacting your ability to work? What would happen to your income? Or worse, your lifelihood?
Well, that’s where income protection insurance policies come into play. They’re designed to replace up to 70% of your pre-tax income during periods you’re unable to work, enabling you to prioritize your rehabilitation.
In contrast to salaried employees who have access to a range of worker's compensation benefits, investing in income protection insurance is the optimal method for self-employed individuals like yourself to safeguard your financial stability.
What are Your Options for Income Protection Insurance?
The good news is, as a sole trader income protection insurance is available to you. However, there are a few criteria that need to be met and key factors that need to be considered before obtaining income protection coverage.
- Regarding eligibility requirements, certain conditions may apply, such as a minimum period of self-employment and/or a minimum number of weekly working hours to be classified as self-employed for an income protection policy.
- Most policies offer coverage for up to 70% of pre-tax income plus super guarantee for a specified period. It is crucial to note that income protection insurance solely covers the loss of personal income, not the income of the business.
- The insurer may require proof of earnings through tax returns or bank statements. If income varies, the average may be calculated instead.
- Currently all new income protection policies are offered as indemnity value policies. Therefore, income is calculated when the claim is made, not when the policy is initiated.
- The benefit period is variable and can range from a year, to a couple of years, or even to age 65 years for qualifying occupations.
- Waiting periods can range between 30 days to 2-years. It is important to ensure adequate savings are available to cover expenses while waiting for benefit payments to commence.
- Generally, premiums are tax-deductible; however, benefit payments are considered taxable income.
- Occupation, age, medical history, and lifestyle habits determine the cost of premiums.
- Most policies offer optional benefits, including rehabilitation benefits (outside super).
It is crucial to review and evaluate different income protection insurance policies before making a decision. Be sure to understand your product disclosure statement (PDS) or consult with an insurance broker to determine what’s available to you and to decide the best policy for your personal circumstances.
What are the Benefits of Income Protection Insurance for the Self-Employed?
There are several potential benefits associated with investing in income protection insurance for self-employed individuals who lack access to traditional employee benefits. Core benefits include:
- Peace of mind knowing that you have a financial safety net. You’ll be able to focus on your recovery without the added worry of financial difficulties.
- Coverage of everyday expenses as benefit payments can be used to pay for bills, groceries, mortgage payments, and even business-related expenses.
- Flexibility, with some policies being able to be tailored to your specific needs, such as the waiting period and benefits. For instance, you can opt for a longer waiting period if you have savings that can hold you afloat for a while.
- No medical tests, meaning you can apply for an income protection insurance policy without needing medical or blood tests.
- Broad coverage for a range of illnesses and injuries, including both physical and psychological conditions.
Like every other insurance policy out there, it’s something you have in the back of your mind but may not invest in, until it’s too late or impossible to do so. Weigh up these benefits and consider how important it is for you to be well protected when the unexpected comes your way.
Get the Help of an Experienced Insurance Broker
At Morgan Insurance Brokers, we simplify the process of acquiring your next insurance policy. We understand the critical importance for self-employed individuals to have peace of mind and comprehensive coverage in adverse situations. Our team of brokers can assist you in evaluating your options and determining the optimal course of action.
It’s always better to be safe than sorry. Contact us today.
Income Protection Insurance vs. Life Insurance: What's the Difference?
In essence, income protection insurance provides you with monthly, ongoing benefits for the duration outlined by your policy's waiting and benefit periods. In contrast, life insurance pays your beneficiaries a lump sum benefit in the unfortunate event of your passing or a terminal illness diagnosis.
Lets Compare Income Protection Insurance and Life Insurance
First, let’s break down the intricacies of income protection insurance.
- It replaces a portion of your income, typically up to 70% due to an unforeseen illness or injury that restricts you from working. However, depending on your insurance policy, some may offer up top up coverage of your pre-tax income for the first couple of months of your benefit period.
- While income protection insurance provides regular payments while you recuperate, the benefit period can vary, from a couple of months to several years, or even a specified age.
- Benefit payments can be used to cover essential expenses such as rent, mortgage, utility bills, groceries, car loans, and more over the course of your recovery period.
- Considered beneficial for those managing debt payments, are self-employed, have dependents, or do not qualify for worker’s compensation benefits.
- Premiums are tax deductible at your marginal tax rate, as long as they are not paid through your superannuation.
- Most income protection policies may include rehabilitation support up to 12 times your monthly sum insured.
Now, let’s take a look at the workings of life insurance policies.
- It provides a lump-sum payment to your beneficiaries if you were to pass away or be diagnosed with a terminal illness.
- It is designed to offer financial protection to your loved ones in the event of your demise.
- The payout can be utilised for whatever purpose the beneficiary’s desire.
- It offers peace of mind to your loved ones knowing that they are financially protected if the worst were to happen.
- Policies may also include additional cover options such as Total and Permanent Disability (TPD) cover, critical illness, as well as child cover.
Here’s a table summarising the key differences:
| Features | Income Protection Insurance | Life insurance |
| Coverage | Loss of income due to injury or illness | In the event of your death or terminal illness |
| Payments | Regular monthly payments | A lump sum payment to a beneficiary |
| Purpose | Covers ongoing lifestyle expenses whilst you’re unable to work | Provides financial security and peace of mind to your beneficiaries |
| Benefit Period | A specified period determined when the policy is purchased | Paid out upon death or terminal illness diagnosis |
| More Benefits | May include additional benefits such as death or rehabilitation benefits | May include TPD, critical illness, and child cover |
Do You Need Both Income Protection and Life Insurance Policies?
Deciding whether you need either policy or both depends on your individual circumstances and the needs of your family and/or dependents. However, one thing to remember is that most if not all Australian superannuation policies offer insurance products as part of their packages – however this may not be an underwritten policy which may result in a more lengthy or difficult claim process. In any case, external Life insurance policies can be paid from your existing superannuation policy also.
Income protection can sometimes be purchased through your super fund, often at a reduced price. However, premiums paid via superannuation are not tax deductible in your personal name, unlike those for a policy purchased outright. Likewise, policies offered directly via your super fund provider may also have limitations. You should consider if you need additional coverage for yourself and your family.
Both types of insurance have different purposes and may not be valuable to you. To decide if income protection insurance is right for you, start by creating a budget of your needs and essential expenses. For life insurance, consider specific risks related to your health or career, particularly if you have a high-risk job. Determine if your beneficiaries, such as your children or spouse, could cover their living costs in the event of your death.
Most importantly, always remember to check your product disclosure statement (PDS) before investing in either a life or income protection insurance policy. If you require assistance, seek the help of an experienced broker to guide you through available options.
Access the Right Coverage with Morgan Insurance Brokers
Contemplating whether life or income protection insurance is suitable for you? Don’t know whether you require both or neither?
Consider reaching out to our team of experienced insurance brokers to help you decide on the best course of action. We’ll help you compare policies, ultimately helping you decide on the best insurance policy for your needs.
A small investment today can save you from a large loss. Contact us today.
