Income Protection insurance pays a monthly benefit if you cannot work due to any accident, injury or illness. Income Protection differs from lump sum payout policies (like trauma cover or TPD), providing a regular income, spread out over time. It’s functions is to replace, as much as possible, the income you might lose after a significant injury or illness prevents you from working. Generally, this amount is up to 75% of your income, but some policies cover slightly more.
It’s a very important type of insurance to know the ins and outs of as there’s a number of features and benefits that vary between policies.
Currently the only kind of income protection policies available in Australia are what’s called indemnity policies, meaning you are insured for what you were earning at the time of claiming. Your income may have risen or fallen from the time you instigated your policy and your insurer will take this into account when determining pay-out amounts.
Many insurers will look also at your earnings over a three-year period, and take an average of this, which can end up being less penal if your actual income has dropped suddenly in a short period. Other insurance companies might take the highest earnings year out of your last 2 or 3 years. These aspects do vary from insurer to insurer, so it’s a good idea to speak to specialists such as SMSF Insurance Partners who can help you mitigate any issues.
Because income protection policies have been designed to replace your regular income stream, waiting times for the first payout are generally short, often as little as fourteen-day days. But, and this is detail it’s good to be across, waiting periods on policies which have less expensive premiums can be up to two years. And in signing up for a policy which has an extended wait time, you need to know that your personal savings, annual, long service leave entitlement, or sick pay is to a level that you could sit out the waiting period without undue financial stress.
The other common trap is payments are made one month in lieu. For example, for a 30-day waiting period you will not receive your first income protection payment until day 60 on claim. If on a 90-day wait, you receive your first payment after 120 days on claim.
When selecting a policy, it is wise to carefully consider your income needs rather than simply focusing on the price of premiums. It’s important to do a cost benefit analysis of what amount of cover you need and what cover you can afford.
The benefit period is the number of years a policy will payout while you remain sick or injured and cannot work. The minimum benefit period is typically 2 years with a maximum benefit up until age 65. The other common benefit period is 5-years. The higher the benefit period the more you will normally pay for the policy, but the more security you will have.
If you have go on claim for a second time for a condition unrelated to your first claim the benefit period resets.
The ATO states that you can claim on the cost of premiums you pay for insurance against your loss of income, but you must include any payouts you get from such a policy in your taxable income.
If your income protection is taken through superannuation, there is generally a 15% tax deduction for premiums paid (rather than at your marginal tax rate if outside super). Claims paid are taxed at your marginal tax rate once released from super.
There are important factors that could make income protection a meaningful choice for you.
Income protection is not a one size fits all solution. There is some variety between policies and insurers and there are factors that will impact on the cost of premiums.
Yes, price is important, but any policy you select must also satisfy criteria around its ability to maintain a stable financial situation during what could be a lengthy time period of zero income.
At SMFS Insurance Partners we have experience in helping you design the most appropriate cover for your needs. Contact us on (07) 30640413 today for help. Or leave a message on the contact us section of our website and we will reach out to you.
SMFS Insurance Partners
Income Protection Deductions, Australia Taxation Office