Income Protection Insurance
What is Income Protection?

Income protection insurance provides an income should you be prevented from working due to sickness or injury.

These insurance policies pay you an income, usually equivalent to 75% of your usual salary, if you are unable to work for a long period. The income is usually paid until your chosen retirement age, you return to work or pass away, whichever first.

If you are self-employed then the benefits under the plan are usually based  on your taxable income over the 12 months prior to you being unable to work.

Care should be taken to check what the insurance company means by disability. Definitions usually fall into 3 categories:

  • Own occupation
  • Own or suited occupation
  • Own or any occupation

As a general rule it is better to consider a plan that pays the benefit if you are unable to carry out your usual occupation, 'Own occupation'. Some plans will only pay a benefit if you are so sick or disabled that you cannot work at all, ‘Own or any occupation’. It is far less likely you will be unable to do any work than you are unable to continue your usual occupation.

Why set up a policy that limits the payout when you need it most when an alternative company may offer you a better definition for the same cost. You may also have an older type of plan with outdated definitions and expensive pricing. It’s for this reason our advice process covers looking into any existing policies you have.

Income Protection insurance is a deductable expense on your tax return but is taxable as earned income when claiming. Since you may also be eligible for Centrelink benefits the income is restricted to a maximum of 75%. There can also be situations where if you are receiving income from other sources, during the period of your sickness or injury, the benefits under you plan could be scaled back. You should discuss this with a financial planner to ensure you are not over insuring yourself.

What are the differences between the types of plan?

The differences between plans are:

The definition of occupation: Some plans will only accept a claim if you are unable to do any work, it is normally more advantageous to consider plans that provide cover against you being unable to carry out your usual occupation..

Term of the cover

The length of potential payout if you were to claim from day one.  You can typically set up your policy to cover you until age 55, 60 or 65 to tie in with your desired retirement age.

Index-linked benefits

You can choose at outset whether you want your benefits to increase to account for inflation.  This is can be an important benefit within an income protection plan since 75% of your salary today is likely to buy you a lot less in 10 or 20 years.

Deferral Periods

You can choose the period of time you must be off sick from work before your policy starts making a payment. Deferral periods range anything from 4 weeks to 12 months, the longer the deferral period the lower the premiums to the policy will be.

You should ensure your adviser is aware of any long term payments from your employer.  An insurance company would wait until your 6 months pay has ceased before making payments to you.

Alternatively, you may feel your savings are adequate in the event of short term illness up to 12 months and set your deferral period to 12 months to reduce cost.

Occupation Risk

Certain occupations are statistically more likely to cause illness or accidents, this means the risk of a policyholder making a claim is greater for the insurer. This extra risk has two ways of showing itself, either through higher premiums for such occupations or in a greater number of restrictions under the policy. After all, why should an office worker pay the same premiums as a deep sea diver?

There are also a number of insurance providers who specialise in insuring specific groups and you may find these more cost effective. Our planners are not limited by a panel and will consider the whole market in discussing the implications of your occupation on the premiums and finding the most suitable provider for you.

Many individuals still hold old outdated policies from previous years with outdated exclusions and premiums. Our financial planners planning reviews will advise you on the suitability of your existing policies and premiums.