Personal Insurance - What is Income Protection Insurance?

February 2, 2021 Kate McArthur

Income Protection insurance (sometimes called salary continuance) differs from other types of personal insurances as it provides an ongoing benefit payment rather than a lump sum.

This type of insurance provides you with a regular payment (weekly/fortnightly/monthly) if you become ill or injured and are unable to work for a period of time. It can help you fund your living expenses (such as groceries and mortgage payments or rent) while you are unable to work. Usually, you are able to insure up to 75% of your pre-disability income (and super contributions).

Features of Income Protection insurance

Income Protection insurance is the most complex in terms of the policy features that are available. It is important to have an understanding of these as they can have an impact not only on the cost but also during the claims process.

Some common (but not all) features are:

Waiting period – This is the period of time that you must wait before you are eligible to claim. Generally, the longer the waiting period, the lower your premiums.

Benefit period – This is the timeframe that your policy will continue to pay you if you are on claim and continue to be unable to work. Generally you can choose between two years and to age 70, and the longer the benefit period the higher the premiums.

Occupation rating – Your occupation will be assessed by the insurer and given a rating based on the risk. For example, if you work in an underground mine you will have a less favourable occupation rating than someone who works in an office. This could impact the benefit period the insurer is willing to offer you and also the cost of your premiums.

Structure – Income Protection insurance can be owned personally (paid from your bank account where premiums are also tax-deductible), via superannuation (premiums paid as a deduction from your superannuation balance), or a combination of both.

Cover type – Insurers generally offer tiered cover (like private health insurers). Standard or basic policies provide simple policy features and premium or comprehensive policies provide the ‘bells and whistles’. For more specific information on this, speak to your financial adviser.

It is imperative you read the Product Disclosure Statement (PDS) prior to applying for Income Protection insurance so that you have a clear understanding of the illnesses and injuries covered by the policy – and to save any heartache should you claim on the policy in the future.

Who should get Income Protection Insurance?

Income Protection cover should be considered where the loss of income would have a significant impact on you and your family. This may include:

- Sole income earners where your entire family depends on a single wage

- Those who have debt, such as property mortgages, personal or car loans

- Self-employed people who do not have or could not take sick or annual leave for an extended period

To determine the right level of income protection cover required, a number of factors need to be considered, such as whether you need to insure all of your pre-disability income; whether you have other passive income sources that would continue in the event you could not work from injury or illness; and whether you have sick/annual/long service leave entitlements available to you.

It is crucial to discuss this with your spouse (if you have one) and a financial adviser so you have a plan in place.

How do you get Income Protection Insurance?

You can obtain Income Protection insurance directly with an insurance company or your superannuation fund, however by engaging an adviser they can assist you in researching and comparing policy features to ensure you apply for cover that is suitable to you.

How do I pay for Income Protection insurance?

Depending on how the policy is structured, you may be expected to pay premiums from your personal bank account (direct debit or BPAY), as a deduction from your superannuation balance, or as a combination of both.

How you choose to fund your insurance premiums will have an impact on either your disposable income or your superannuation balance. Both options will have repercussions for your financial situation and should be carefully considered.

Our team of specialists are here to help

To ensure you are equipped with everything you need to make an informed decision, get in touch with the Rethink Financial Planning team for our personalised financial advice to work through the pros and cons of whether or not this is the right strategy for you.