Income Protection Insurance
Everything you need to know about Income Protection Insurance
Income Protection Insurance
Everything you need to know about Income Protection Insurance
Understanding Income Protection Insurance: What You Need to Know
What Is Income Protection Insurance?
How Does Income Protection Insurance Work?
When signing up for Income Protection Insurance, policyholders have the flexibility to select a waiting period. This waiting period is the interval between the onset of an illness or injury and when the insurance benefits start to be paid. Policyholders can choose a waiting period that suits their needs and budget, with options typically ranging from as short as 14 days to as long as two years. Shorter waiting periods generally result in higher premium costs, so individuals can adjust this based on their savings and how long they can manage financially without the insurance kicking in.
The benefit period of Income Protection Insurance is another critical aspect. It defines how long the insurance payouts will continue while the insured is unable to work. This duration varies widely depending on the policy chosen and can extend from a few years to until the policyholder reaches retirement age, typically 65 years. Choosing the right benefit period involves considering one’s career longevity and potential health risks, ensuring continuous financial coverage until one can either return to work or transition smoothly into retirement
Why you should engage Morgan Insurance Advisors as your preferred Income Protection Insurance Advisor
Morgan Insurance Advisors offer access to an extensive range of insurance products from multiple providers, conducting thorough market comparisons. This process is designed to save you time and help you make well-informed decisions based on a detailed analysis of the market.
Our service is grounded in providing factual and comprehensive comparisons. We break down the complex details of various Income Protection Insurance policies, clarifying the terms and conditions so you can fully understand each option. This empowers you to select the policy that best meets your needs without any unnecessary complications.
Our goal is to ensure you have all the information you need to make the best choice. By analysing a wide variety of products and presenting the facts clearly, we enable you to identify the policy that aligns with your financial situation, career path, and long-term goals.
INCOME PROTECTION CLAIM EXAMPLES
Here are 10 examples of situations where Income Protection Insurance claims might typically be made:
Back Injury: A construction worker suffers a back injury while lifting heavy materials, leading to several months off work.
Stress-Related Illness: A corporate executive develops severe stress-related symptoms, requiring a leave of absence to recover.
Broken Leg: An employee slips and falls at work, resulting in a broken leg that prevents them from commuting and working.
Severe Flu: A teacher contracts a severe case of the flu, leading to extended time away from the classroom during recovery.
Surgery Recovery: An office worker undergoes major abdominal surgery and needs time off to recover before they can return to their desk job.
Mental Health Break: A healthcare professional takes a leave of absence due to burnout and depression, necessitating several months away from work.
Repetitive Strain Injury: An IT professional develops carpal tunnel syndrome from extensive computer use and requires time off for surgery and rehabilitation.
Chronic Illness Flare-up: An individual with chronic arthritis experiences a significant flare-up, making it impossible to perform their job duties for an extended period.
Pregnancy Complications: A pregnant employee faces serious complications requiring her to stop working earlier than expected.
Accident Recovery: A retail manager is involved in a car accident, sustaining injuries that keep them out of work while they undergo physical therapy.
These examples cover a range of common scenarios where individuals might claim income protection insurance, reflecting the broad applicability of this type of insurance to various health-related work interruptions.
WHAT DOES INCOME PROTECTION INSURANCE COVER?
As your preferred Income Protection Insurance Advisors, Morgan Insurance Advisors can source comprehensive Income Protection Insurance policies that offer general protection, which may include cover against:
What expenses are covered?
Income Protection Insurance in Australia primarily helps by replacing up to 70% of your gross income if you’re unable to work due to illness or injury, ensuring your financial stability. The benefits from this insurance can be used to cover a wide array of financial commitments, including day-to-day living expenses, medical and rehabilitation costs, mortgage and other debt repayments, and even the insurance premiums themselves. Additionally, it supports your ability to continue saving and investing, maintaining your financial health during periods when you cannot earn an income due to health issues. This comprehensive support allows you to focus fully on your recovery without worrying about financial burdens.
Loss of Income
Medical Expenses
Rehabilitation Costs
Transportation
DO I NEED INCOME PROTECTION INSURANCE?
Deciding whether you need income protection insurance depends on a number of factors related to your personal financial situation. Here are some considerations that can help you determine if this type of insurance is necessary for you:
Financial dependents: If you have people who depend on your income, such as children or a spouse, income protection insurance can provide important financial stability in the event you are unable to work due to illness or injury a.
Employment Benefits: Review sickness or disability benefits provided by your employer. If these benefits are limited or short-lived, income security insurance can provide long-term protection.
Savings and emergency funds: Consider your savings and whether you have enough money to support yourself and your family in the event of long-term insolvency. If your savings are insufficient, income security can fill this financial gap.
Debt Obligations: If you have significant financial obligations such as a mortgage or car loan, income security can ensure that you can continue to meet these commitments without having to hold them.
Nature of your job: If your job involves physical hazards or is particularly demanding, your inability to work for health reasons may be greater, making income protection more appropriate.
Income protection insurance is primarily about ensuring peace of mind. Provides financial security in the event that health issues prevent you from working, allowing you to maintain your lifestyle and meet financial commitments.
Income Protection Insurance for a Sole Trader
For self-employed individuals and contract workers, the absence of traditional employment benefits like sick leave and disability insurance presents a unique financial vulnerability. Unlike employees who may receive paid leave or disability benefits through their employer, those who are self-employed bear the full brunt of financial instability when unable to work due to illness or injury.
Income protection insurance is particularly crucial in these circumstances as it serves as a safety net, providing a substitute income during periods of health-related absence from work. This insurance is designed to cover a significant portion of lost earnings, ensuring that self-employed professionals and contractors can continue to meet their regular financial obligations.
IS INCOME PROTECTION INSURANCE MANDATORY?
Income protection insurance is not compulsory. It is an optional policy that individuals can buy to protect their earnings if they’re unable to work because of sickness or injury. This insurance provides a substitute income when you’re incapacitated, helping to maintain financial stability during periods where you cannot earn an income. Although it isn’t legally required, it’s often considered a wise investment, particularly for those with families or substantial financial responsibilities.
INCOME PROTECTION VS PERSONAL ACCIDENT
Personal Accident Insurance policies are typically structured as generic offerings with predetermined levels of coverage. In contrast, Income Protection insurance presents more flexibility, offering a selection of benefits that can be customised according to the policyholder’s needs.
Additionally, Income Protection policies often encompass a broader spectrum of illnesses and offer more extensive benefits.
While Personal Accident insurance limits coverage to accidental bodily injuries or illnesses within a specified benefit period up to 2 years—Income Protection insurance provides the opportunity to tailor the benefit period more precisely to the individual’s requirements.
Given this enhanced adaptability and the comprehensive nature of the coverage, Income Protection insurance is generally more costly compared to Personal Accident insurance. This reflects the higher value and protection it offers, making it a prudent choice for those seeking extensive income security.
How Much Does Income Protection Insurance Cost?
Income Protection Insurance cost can vary significantly based on a range of factors including age, occupation, health status, coverage amount, and the specific terms and conditions of the policy. Understanding these factors can help individuals make informed decisions when selecting an income protection insurance policy.
What are the factors in determining the Income Protection Insurance cost?
There are many different considerations that insurance companies use to calculate the cost of an income protection insurance policy.
Your occupation
The nature of one’s job plays a critical role in determining the cost of income protection insurance. Jobs are categorised based on risk levels, with higher-risk occupations leading to higher premiums. For instance, a construction worker, who frequently works in potentially dangerous environments and engages in strenuous physical activities, would pay substantially more for income protection insurance compared to an office worker who are considered safer, with minimal risk of injury or illness due to work-related activities.
Coverage Amount
The amount of coverage desired is a significant factor influencing the cost of income protection insurance.
% of your income
Policies that cover a higher percentage of the insured’s income or offer higher monthly benefits will naturally cost more. A policy with a 75% benefit, rather than 60% will be more expensive.
Waiting periods
The waiting period is the time between the onset of the disability and the commencement of benefit payments. Policies with shorter waiting periods (e.g., 14 days) are more expensive than those with longer waiting periods (e.g., 90 days).
Benefit Period
How long the payments will continue can influence costs. Policies that pay out until retirement age (65) are more costly than those with shorter benefit periods such as 2 years.
Your Age
One of the primary factors influencing the cost of income protection insurance is age. Younger individuals typically benefit from lower premiums as they are considered to be at a lower risk of health issues that could lead to prolonged periods off work.
As individuals age, the risk of encountering health problems increases, leading insurers to charge higher premiums. This increase in premiums with age reflects the heightened likelihood of health issues and the greater financial risk to the insurer.
What are stepped premiums?
Stepped premiums are insurance payments for policies such as income protection insurance and life insurance policies that start off lower and increase each year as you age.
Who should consider stepped premiums?
Stepped premiums are particularly suitable for young individuals, those who need to minimize costs now but still require coverage, and individuals who foresee a change in their occupation or financial situation in the future that might reduce the necessity for life insurance. This type of premium structure is designed to start at a lower rate and gradually increase each year as the policyholder ages.
What are level premiums?
Level premiums are a type of insurance payment structure where the premium remains consistent throughout the policy’s duration, offering long-term cost stability and predictability.
Who should consider level premiums?
Level premiums offer predictability, making them an excellent choice for individuals on a budget, those with a fixed income, or those approaching retirement. Their stability is particularly advantageous for long-term financial planning. While the initial cost of level premiums may be higher, they remain affordable as the individual ages, ensuring consistent and manageable insurance expenses over time.
How do I decide which premium type is right for me?
Choosing between stepped and level premiums depends on your financial situation, long-term goals, age, health, and coverage duration needs. Stepped premiums start lower, making them ideal for young professionals or those with tight budgets, but they increase over time. In contrast, level premiums remain consistent, providing stability and predictability, which is beneficial for older individuals or those planning for retirement. If you expect a significant income rise, stepped premiums might be manageable, but if you foresee a fixed income, especially during retirement, level premiums are preferable.
The choice is completely yours. Morgan Insurance Advisors provides General Advice Only, and does not take into consideration your personal or financial needs to make this decision.
Choosing between stepped and level premiums for insurance policies involves understanding the trade-offs between initial cost and long-term affordability. Stepped premiums start lower but increase annually, making them attractive to younger individuals or those seeking short-term affordability. However, these premiums can become prohibitively expensive as you age. On the other hand, level premiums remain consistent throughout the policy, offering long-term stability and predictability, which can be advantageous for budgeting and avoiding financial strain in the future. Although level premiums have higher initial costs, they can be more economical over time if the policy is maintained for many years. The best choice depends on your current financial situation, long-term financial planning, expected future income, and how long you plan to keep the insurance policy. Younger people or those expecting significant income growth might prefer stepped premiums initially, while older individuals or those seeking budget predictability might benefit more from level premiums.
FREQUENTLY ASKED QUESTIONS ABOUT INCOME PROTECTION INSURANCE POLICIES
In Australia, if your employer chooses to shut down their business, relocate operations to a different location, or close the current business in order to start a new venture, you may find yourself without employment. Such scenarios where job loss results from the employer’s decision to cease business operations or undertake significant restructuring are not uncommon. It is important to understand that in these circumstances, income protection insurance typically does not provide coverage. Income protection policies in Australia are designed to offer financial support when you are unable to work due to illness or injury, not due to economic changes or business decisions made by your employer. Therefore, if you are terminated because the business you work for is ending or moving, income protection insurance will not compensate you for lost income during your period of unemployment.
Under most income protection policies, if you return to work before the end of the designated benefit period and begin earning a partial income, you are likely eligible for what is termed as ‘partial disability benefits’. These benefits are designed to supplement the income you earn, should you find yourself capable of working in a limited capacity but not yet able to return to your full duties or previous earning capacity.
Partial disability benefits effectively bridge the gap between your partial earnings and the level of income protection initially determined by your policy, supporting a more flexible and gradual transition back to work. This arrangement acknowledges that recovery can be a progressive journey, allowing you to gain financial support while encouraging a return to professional activity as your health permits. It’s important to review your specific policy details or consult with your insurance provider to understand the precise terms and conditions that apply to earning additional income during the benefit period.
Income protection insurance offers essential financial support when illness or injury prevents you from working, but it’s important to know the limitations and exclusions that typically accompany these policies. Being aware of these exclusions helps in setting realistic expectations about the scope of the insurance cover. Here are some common exclusions that you’re likely to encounter in income protection insurance policies:
Pre-existing Medical Conditions: Coverage does not typically extend to health issues that were known or diagnosed before the policy initiation. This includes any related symptoms or treatments that existed prior to the commencement of the policy.
Injuries Caused by Self-Harm: Any injuries that are the result of intentional self-harm, including suicide attempts, are usually not covered under income protection policies.
War & Terrorism: Any disability or injury resulting from wars, acts of terrorism, or similar conflicts is generally not included in the coverage.
Illegal Activities: Injuries or disabilities that arise while engaging in unlawful acts or as a result of criminal behavior are not covered.
High-Risk Behaviors: Participation in activities that are considered dangerous or high-risk, such as certain extreme sports or professional sporting events, may lead to exclusions from coverage.
The waiting periods available for choosing are 30 days, 60 days, or 90 days. This is the period you must wait after becoming disabled before your insurance benefits can start.
Income protection insurance benefits are generally paid on a monthly basis, but in arrears. For example, if your policy has a 30-day waiting period, you would receive your first payment 60 days after the onset of disability.
The timing is structured such that there is always a month delay from the end of the waiting period to the disbursement of your first payment.
Yes, premiums paid for income protection insurance are generally tax-deductible. This is because the insurance is considered a way to protect your income-earning capacity, and thus the premiums are viewed as an expense incurred in earning taxable income.
The cost of Income Protection Insurance can vary widely based on several factors such as
- Age
- Occupation
- Health status
- Cover
Consulting with an expert, like Morgan Insurance Advisors, can help you navigate these variables and find the most cost-effective solution tailored to your specific circumstances.
Determining whether you have income protection insurance within your superannuation fund depends on the specific provider and the type of superannuation fund you’re in. Many superannuation funds include default insurance coverage as part of their offering.
Morgan Insurance Advisors can help you navigate this process. Our team can review your superannuation details to determine if you have income protection insurance and advise you on the best options available.
The maximum benefit of income protection is usually 70-75% of your pre-tax income. You can also choose longer benefit periods, and shorter wait periods to maximum your income protection insurance payouts.
Here is a summary of the differences between income protection insurance and workers’ compensation (WorkCover) in a comparison table:
| Feature | Income Protection Insurance | Workers’ Compensation (WorkCover) |
|---|---|---|
| Purpose | Provides a portion of income if unable to work due to illness or injury | Covers employees for work-related injuries and illnesses |
| Coverage Scope | Both work-related and non-work-related illnesses and injuries | Only work-related incidents |
| Income Replacement | Up to 75% of pre-tax income | Typically 85-95% of wages initially, may reduce over time |
| Benefit Period | A few months to up to age 65 or longer | Varies by jurisdiction, may be limited |
| Waiting Period | 14 days to two years | Immediate, but claims process required |
| Medical Expenses | Not typically covered | Covers medical treatment and rehabilitation costs |
| Permanent Impairment | Not typically covered | May include lump sum payments for permanent impairment |
| Policyholder | Individual | Employer |
| Premium Payment | Paid by individual | Paid by employer |
| Flexibility | Customizable benefit amount, waiting period, and benefit period | Limited flexibility, set by state or territory regulations |
| Eligibility | Based on individual policy terms | Must be work-related, follow claims process |
| Factor | Considerations | Typical Guidelines |
|---|---|---|
| Retirement Age | Plan to retire at a specific age; Ensure sufficient superannuation and retirement savings | Many stop at or around age 65 |
| Financial Stability | Assess substantial savings, investments, debts, and financial obligations | Stop when financial obligations are met |
| Health Status | Evaluate current health, potential risks, and existing health insurance | Good health and comprehensive health insurance might justify stopping earlier |
| Policy Terms | Understand policy expiry age and increasing premiums with age | Policies often cease at age 65 |
| Typical Age Range | Align with retirement plans and financial readiness | Early retirement or age 65 |
| Personalized Advice | Seek tailored advice from financial or insurance specialists | Consult Morgan Insurance Advisors |
The choice between life insurance and income protection insurance depends on your personal circumstances, financial goals, and the needs of your dependents.
Consider Life Insurance If:
- You have dependents who rely on your income.
- You have significant debts (e.g., mortgage) and want to ensure they are covered.
- You want to provide a financial safety net for your family in the event of your death.
Consider Income Protection Insurance If:
- You rely on your income to cover living expenses.
- You want to ensure financial stability if you are unable to work due to illness or injury.
- You have financial obligations that need to be met regularly, even if you are unable to work.
Income protection insurance is designed to provide you with a regular monthly income if you are unable to work due to illness or injury. This type of insurance typically covers up to 75% of your pre-tax income, ensuring that you can maintain your living expenses during your recovery period. The benefits are paid out for a specified period, which can range from a few months up to age 65, depending on your policy terms. Income protection is ideal for situations where you experience a temporary or prolonged inability to work but are expected to recover and return to employment.
On the other hand, TPD insurance provides a one-time lump sum payment if you are diagnosed with a total and permanent disability that prevents you from ever returning to work. This lump sum is intended to offer long-term financial security and can be used to cover significant expenses such as medical bills, home modifications, and ongoing care needs.
While you can receive Centrelink benefits while on income protection, the payments you receive from your insurance policy will affect the amount and eligibility for certain Centrelink benefits. It’s important to report all income accurately as Centrelink applies an income test to determine eligibility for payments such as JobSeeker Payment, Disability Support Pension, and other allowances. If your income protection payments exceed certain thresholds, your Centrelink payments may be reduced or you may become ineligible for certain benefits.
When income protection insurance premiums are paid through your superannuation fund, the premiums are considered to be paid by the fund, not by you directly. The superannuation fund can claim a tax deduction for these premiums, which effectively reduces the tax liability of the fund. Since you are not paying the premiums out of your personal, after-tax income, you cannot claim a personal tax deduction for them.
If your income protection insurance is paid through your superannuation fund, the premiums are not directly tax deductible for you personally. Instead, the superannuation fund can claim a tax deduction for the premiums paid.
The portion of the income protection insurance premium that is tax deductible in Australia is typically the part of the premium that covers the loss of income.
Income protection insurance premiums are generally tax-deductible in Australia.
Income protection insurance premiums are exempt from GST (Goods and Services Tax). This means that you do not have to pay GST on the premiums for your income protection insurance.
What is excluded from income protection insurance?
Income Protection Insurance policies offer crucial support for a range of circumstances. They provide coverage for lost income due to illnesses or injuries that prevent you from working, with various options for customisation and extensions available. However, it’s important to note that not all policies provide the same extent of coverage, and many come with standard and specific exclusions that could impact your financial security.
Pre-existing Conditions:
Drug or Alcohol Influence
Dangerous Sports and Activities
Exposure to exceptional danger
Amateur Football
Intentional Self-Injury
Criminal Acts
War and Civil Commotion
AIDS
Childbirth
Professional Sport
How Morgan Insurance Advisors can help you insure for Income Protection Insurance
As your dedicated Income Protection Insurance Advisor, we focus on providing you with general information and detailed comparisons of various policies. Our aim is to equip you with the knowledge needed to make an informed decision. By presenting a wide range of options and clearly explaining the differences between them, we help you find coverage that best fits your needs. Our comprehensive approach ensures you have all the necessary information to choose the most suitable policy based on your unique situation.
General Advice: The information in this communication contains general information only. We have not taken into consideration any of your personal objectives, financial situation or needs. Before taking any action you should consider whether the general advice contained in this communication is appropriate to you having regard to your situation or needs. We recommend you consult a licensed or authorised financial adviser if you require financial advice that takes into account your personal circumstances.
