Income protection insurance: Why get covered?

Here are some fast, potentially surprising facts for you:

• Nearly two thirds of homes in Australia have outstanding debt, and 10% don’t think they’ll be able to meet minimum debt requirements over the next year.
• Yet, 30% of Australians would wait for something bad to happen before they purchased a product like life insurance.
• And in an emergency, nearly 1 in 5 households wouldn’t be able to raise $3,000 to combat expenses. An additional 12% stated they’d need to do “something drastic” to secure this windfall.

More than a quarter of Australians have income protection that could potentially help keep on top of expenses, although the global average is closer to 33%. So, why is this product so valuable? What expenses will it cover? And – the most important question – can anyone get it?

What is income protection?

In the event you become ill or you’re injured, you may have to take time off work. Could you afford the new medical bills? What about the rest of your household bills, and your loans? If the answer is, ‘I’d struggle’, income protection may be the product for you.

This form of insurance generally replaces up to 70% of your monthly income for a set period of time, although you can insure yourself for less. For some insurers, when you’re on a claim, they’ll only pay a benefit to you for two years, and others will pay a benefit until a certain age. In any case, your claim will cease if you’re able to go back to work again, or if you’ve exceeded the benefit period.

You will need to sit through a waiting period between when you stop work, and when you begin receiving your benefit. Additionally, you will be unable to claim for a period of time when first taking out cover – several months, depending on which insurer you choose.

How much does it cost?

Your income protection costs will vary depending on a wide range of factors. For example, if your income is quite large and you wish to protect it all (to the maximum allowable), you’re likely to pay more in premiums.

Your income protection costs will also depend on the premium structure you choose for your policy. There are two types of premium structures for income protection:

• Variable age-stepped premiums (previously known as stepped premiums) start off less expensive than variable premiums when you first take out cover, but are priced each year based on your age. Premium increases are typically more significant as you get older.
• Variable premiums (previously known as level premiums) cost more initially, compared to variable age stepped premiums, but may be cheaper than those premiums in later years. This is due to the insurer attempting to spread the cost of cover over multiple years, based on your age when the policy starts. Variable premiums aren’t fixed and can also increase at the policy anniversary to reflect the Consumer Price Index (CPI). You should also know that some policies with variable premiums revert to a variable age-stepped premium once you hit a certain age – which will differ per policy.

It’s important to be aware that neither variable age-stepped or variable premium structures are fixed, and it’s likely that premiums will increase over time if, say, the benefit amount increases, the insurer updates their premium rates, discounts no longer apply or in response to government charges. Should your benefit amount increase, the cost of cover will be priced based on your age at the date of increase. This will generally result in a higher premium rate than the original cover.

To learn more about the different premium structures, you can refer to the Council of Australian Life Insurers (CALI) life insurance premiums Key facts sheet. The options available vary between insurers, so it’s important to also read the Product Disclosure Statement (PDS) for details on each insurer’s offering.

Potential ‘benefits’

There are lots of benefits to being covered by income protection. A key one is the satisfaction that your financial situation is more secure. There are other, more tangible advantages for you to consider, although some/all may not be available with every policy.

• Death benefits (i.e. a lump sum of cash, paid to your dependents in the event of your death).
• Surgery benefits
• Retraining benefits
• Accommodation, transportation assistance

Additionally, some insurers won’t charge you any premiums while you’re claiming on your income protection. The final advantage is that income protection can be claimed on your annual tax return. However, you can only do this if you’re paying your premiums out of your pay cheque, not your pre-tax income that goes towards your superannuation.

There is plenty to look forward to, but you shouldn’t postpone getting covered. Accidents happen all the time, and you’re better off preparing for them now than not at all.

Ready to look for cover? Find a policy by using our comparison service, or learn about some of the other types of income protection.

The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.