Income Protection Insurance is a crucial safeguard for individuals who rely on their income to support themselves and their families. Without a steady income, meeting financial obligations such as mortgage payments, household expenses, and daily living costs can become a challenge. This type of insurance provides a safety net, ensuring that you continue to receive a portion of your earnings if you’re unable to work due to illness or injury.
Understanding Income Protection Insurance
Income protection insurance provides financial support if you are unable to work due to illness or injury. It replaces a percentage of your income for a specified period, allowing you to meet financial obligations while focusing on recovery. This type of insurance is particularly important for individuals with dependents, self-employed professionals, and those with ongoing financial commitments like a mortgage or loans.
The amount and duration of payments vary depending on the policy. Generally, policies pay up to 90% of pre-tax income for the first six months and up to 70% thereafter. It’s important to note, however that policies paying 90% are typically more expensive. Every policy has specific terms regarding disability definitions, waiting periods, and benefit durations, which can impact when and how you receive payments. Understanding these nuances ensures you have the right coverage for your needs.
What Income Protection Insurance Covers
Income protection insurance covers lost income due to total or partial disability caused by illness or injury. Key benefits of this cover include:
- Regular monthly payments: A portion of your salary is paid during the benefit period.
- Coverage for a range of medical conditions: Policies cover illnesses and injuries not otherwise excluded.
- Customisable waiting and benefit periods: You can select a waiting period (typically from 14 days to two years) and a benefit period (commonly two years, five years, or until retirement age).
- Partial disability payments: If you can return to work but only in a reduced capacity, some policies provide partial benefits by topping up your income up to the benefit amount to compensate for lost income.
These benefits provide financial stability during challenging times. However, it is essential to check the policy’s definition of total and partial disability, as insurers have varying criteria for claims eligibility.
What Income Protection Insurance Does Not Cover
While income protection insurance is a valuable safeguard, it does not cover every situation. Common exclusions include:
- Pre-existing conditions: Some policies exclude illnesses or injuries diagnosed before taking out the policy.
- Self-inflicted injuries: Intentional harm or injuries resulting from reckless behaviour are typically not covered.
- Redundancy or job loss: Income protection does not provide coverage for unemployment or redundancy.
- Non-disclosed medical conditions: If you fail to disclose relevant medical history during the application process, claims related to those conditions may be denied.
- Short-term illnesses: Policies usually have a waiting period before payments commence, so short-term illnesses may not qualify for benefits.
Understanding these limitations can help set realistic expectations about what your policy can and cannot do.
Income Protection Through Superannuation
Many Australians have default income protection insurance through their superannuation fund. While this is a convenient and often cost-effective option, it has significant limitations, such as:
- Lower benefit amounts: Superannuation policies generally provide lower income replacement rates than standalone policies.
- Shorter benefit periods: The coverage period for policies inside super is often limited to two to five years, whereas standalone policies may extend to retirement age.
- Stricter eligibility requirements: Super fund insurers may have more restrictive definitions of disability, making claims harder to access.
If your superannuation fund provides income protection insurance, it is crucial to review the level of coverage to ensure it meets your needs. For many individuals, a separate retail income protection policy may provide better protection.
Choosing the Right Income Protection Policy
When selecting an income protection policy, consider the following factors:
Policy Type
- Indemnity Value Policies: The benefit amount is based on your salary at the time of a claim. If your salary decreases, your payout is lower.
- Agreed Value Policies: Based on an agreed income amount at the time of signing up. These are no longer available for new customers but remain valid for those who purchased before 31 March 2020.
Waiting Period
The waiting period is the time you must wait before receiving payments. It can range from 14 days to two years. Choosing a longer waiting period generally lowers premiums but requires you to rely on other income streams (such as savings or sick leave) in the meantime.
Benefit Period
The benefit period determines how long payments will continue if you remain unable to work. Common options include two years, five years, or up to age 65. The longer the benefit period, the higher the premium.
Premium Types
- Age-stepped premiums: Start lower but increase with age.
- Level premiums: Start higher but do not rise due to age, making them more predictable over time.
Balancing affordability with sufficient coverage is key when selecting the right policy.
Why and When You Should Review Your Cover
Many Australians assume they have adequate income protection through superannuation, only to find out at claim time that their policy does not meet their needs. A thorough review ensures:
- You have enough coverage to replace lost income.
- Your policy includes a suitable benefit period and waiting period.
- You understand policy exclusions and any potential limitations.
Life events such as getting married, having children, buying a home, changing jobs, or experiencing a significant income change should prompt a review of your income protection insurance. Ensuring your coverage aligns with your current financial responsibilities is essential.
If you are unsure about your current income protection insurance, seeking expert advice can help you identify gaps and secure comprehensive coverage that protects your financial future.
Speak to an Expert
At Priority Advisory Group, we specialise in tailoring income protection solutions to suit your unique financial situation. If you’d like a professional review of your current coverage or assistance in securing a suitable policy, our Life Risk Insurance team is here to help.
Call us on 1300 349 188 or visit our website to book a consultation.
Protect your income today—because waiting until you need it is too late.