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How to Choose the Right Income Protection Insurance Policy for You

November 10, 2023 | Insurance

It’s a regular day for Sarah, a 41-year-old marketing manager preparing for a major presentation when disaster strikes. She slips and falls down a flight of stairs, severely injuring her back. After a trip to the emergency room and several doctor’s visits, she received devastating news: she had to undergo surgery and would be unable to work for an extended period.

While we all strive for stability and prosperity, life has an uncanny way of throwing us a curveball.

That is where income protection insurance comes in: a solid financial safety net that secures your livelihood even if you are unable to work due to illness or injury. However, with so many products available, selecting the best income protection insurance in Australia can be difficult.

Fear not –  we will walk you through the process of selecting the best coverage for your needs and lifestyle in this post. And if you need more help, call our experts to help you choose the right income protection for you.

What is income protection insurance?

Income protection is a long-term insurance policy that provides you with regular monthly payments to offset a portion of your lost income if you are unable to work because of illness or injury.

This invaluable financial tool provides peace of mind, as it helps you cover essential expenses during the times when your paycheck might not be coming in as expected.

Income protection insurance aims to substitute your income by typically considering your annual earnings from the year preceding your illness or injury.

Every income protection policy comes with its specific criteria for partial or total disability that must be satisfied before a claim can be filed. It’s advisable to review your policy’s product disclosure statement (PDS) for the specific definition and any applicable exclusions.

What is a product disclosure agreement?

Why Is Income Protection Insurance Crucial?

Income Protection insurance is a financial lifeline that ensures you receive a portion of your income in the event you’re unable to work due to illness or injury. It is a safety net that safeguards your financial well-being and helps you maintain your standard of living when the unexpected occurs.

This cover offers comprehensive 24/7 coverage worldwide and can provide you with monthly benefits, starting after the Waiting Period, for a designated timeframe known as the Benefit Period.

Income Protection is designed to help you maintain your household and provide for your loved ones while you recover. In essence, Income Protection eases financial pressures, allowing you to focus on your recuperation.

Who Should Consider Getting Income Protection Insurance? 

Eligibility for Income Protection extends to all Australian individuals who are gainfully employed, usually within the age range of 19 to 70 (age at next birthday). To apply for Income Protection Insurance, you will be required to submit an application, subject to a comprehensive evaluation process (referred to as underwriting) to ensure the insurer can extend cover to you.

Income Protection Insurance is a valuable financial tool for a wide range of individuals, including:

  • Sole Breadwinners: If you’re the primary income earner in your family, income protection insurance ensures your loved ones are financially secure even if you can’t work due to illness or injury.
  • Dual-Income Households: Dual-income households benefit from income protection insurance because it provides peace of mind and maintains their lifestyle if one partner is unable to work.
  • Self-Employed and Freelancers: Self-employed individuals often lack the safety net of sick leave. Income protection insurance is crucial for ensuring their income continues in times of need.
  • High-Income Earners: High-income earners often have significant financial responsibilities. Income protection insurance can help them maintain their lifestyle and meet their financial commitments.
  • Anyone with Financial Obligations: If you have financial obligations like mortgage payments, loan repayments, or family-related expenses, income protection insurance is a wise choice to ensure you don’t fall behind in tough times.

What are the terms and conditions of income protection insurance?

Income protection insurance emerged as a vital safety net for Australians in an increasingly financially volatile world. However, in order to manage this insurance successfully, the terms and conditions must be decoded.

What does Income Protection Insurance Cover?

Income Protection Insurance can pay up to 90% of an individual’s pre-tax income in the first six months, and up to 70% for a specified time after six months.

How much income replacement can you get?

Income protection insurance replaces lost income based on the insured’s yearly earnings in the 12 months before the illness or injury. It covers some of the insured’s lost income if they are unable to work because of an illness or injury, so they can pay their bills and focus on recovery.

Eligibility requires the insured to be gainfully employed, working a minimum of 20 hours of work per week (subject to occupation type).

It’s crucial to note that this is an insurance product, not a savings instrument. Upon the plan’s conclusion, there are no refunds, and it does not accrue cash value. Similar to other insurance policies, the premiums you pay serve to provide protection in the event of the insured occurrence, such as disability caused by illness or injury or partial or total disability resulting in a loss of income.

What does the Waiting Period mean?

The waiting period refers to the duration you must patiently wait before your insurance claim can come into effect. It’s the time between when the policyholder experiences total or partial work disability and when they become eligible for benefit payments.

Depending on the policy, the waiting period for income protection insurance in Australia ranges from 14 days to two years. Most income protection insurance policies offer waiting periods of 30, 60, or 90 days.

But why would you choose a policy with a lengthier waiting period? 

Generally, if you choose a longer waiting period, your policy will be cheaper. When deciding on the waiting period for your coverage, you should consider your accrued sick leave, emergency savings and household cash flow.

What does Benefit Period mean?

The Benefit Period is the length of time that monthly benefit payments will continue if you are unable to work due to illness or accident. It specifies the maximum amount of time that a claim for a specific illness, injury, or connected condition can be paid out.

Note that the benefit period is only applicable while the insured is disabled. Most policies will pay partial disability benefits if the insured returns to work before the conclusion of the benefit period and begins to receive some income again.

What does Underwriting mean?

Underwriting is the process of assessing insurance risk prior to issuing a policy. This usually entails questions about your job, medical history, and recreational hobbies. The goal of underwriting is to ensure that the insurance premiums and coverage conditions are appropriate for your specific medical situation, lifestyle, and occupation. It also assists the insurer in determining whether or not they can offer you insurance and, if so, under what terms.

What’s Not Covered?

Insurance providers must comply with anti-discrimination laws and disclose any exclusions or limitations in their policies.

These exclusions are in place to protect the insurance provider from excessive risk and to ensure that the coverage provided by the policy is for unexpected events and accidental injury that are outside of the policyholder’s control.

Any form of pregnancy is not covered. This includes normal and uncomplicated pregnancy, childbirth or miscarriage.

Any intentional acts of self-harm are not covered. Income protection cover is limited to accidental injuries.

Drug and alcohol-related sickness or injury are not covered. You can’t make a claim from your income protection policy if you are over the legal blood alcohol limit for driving or have taken drugs (other than those prescribed for you and taken in the correct dose).

Unadvised travel abroad is not covered, for example, if the claim is made while in a location with a ‘Do Not Travel’ warning advice from the Australian Department of Foreign Affairs & Trade (DFAT).

Criminal activity is not covered. This pertains to claims caused as a result of or during committing or attempting to commit a criminal offence.

You are not covered when in gaol or lawfully detained including claims caused as a result of, or during, your being in goal or lawful detention.

War and terrorism are not covered. This pertains to terrorism, civil commotion or unrest; war, or an act of war.

What are the Premiums and Cost Factors?

When it comes to securing your financial future with Income Protection Insurance in Australia, a key factor lies in navigating premium costs. These premiums are determined by factors such as your age, occupation, health, benefit period, and waiting period.

Typically, younger and healthier individuals enjoy lower premiums, while higher-risk occupations or a preference for shorter waiting periods might nudge up the cost. It’s crucial to strike a dynamic balance between premium costs and the robust coverage you require.

Never compromise quality for affordability. Scrutinise an insurer’s reputation, their claims processing statistics, and the nitty-gritty of policy terms.

Understanding what determines the cost of your premiums is essential for informed decision-making. To give a better idea, here’s a breakdown of the average monthly direct income protection premiums for different occupations of people in their 30s, such as registered nurses, retail managers, store persons, and truck drivers.

Earlier we mentioned that you have the option to select a waiting period when considering income protection insurance. The longer you opt to wait before you start receiving income benefits, the more affordable your premiums become.

Policy Types

Income protection policies can be either an indemnity value policy, which is a percentage of your salary, or an agreed value policy, which is more expensive but useful for variable income.

Indemnity value policy — When you file a claim, the amount you’re insured for is a percentage of your salary. If your income has reduced since you purchased the policy, you will receive a lower monthly insurance premium. If you have a variable income, your insurance coverage will be determined by your occupation’s average annual earnings during a specified time period.

Agreed value policy — When you sign up for the policy, you are insured for a percentage of an agreed-upon amount. These policies are normally more expensive, but they can be handy if your income fluctuates from year to year.

*Starting March 31, 2020, new customers can’t get agreed value policies. If you got one before that date, you can keep it. When switching, you can only get indemnity value policies, which are usually more affordable and suitable for those with a steady income.

Premium Types

In most cases, you can pay for income protection insurance premiums with either:

Stepped premiums — recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age.

Level premiums — charge a higher premium at the start of the policy, but changes to cost aren’t based on your age so increases happen more slowly over time.

Your choice of stepped or level premiums has a significant impact on the cost of your premiums now and in the future.

It’s worth noting that the Australian Taxation Office (ATO) usually allows income protection insurance premiums to be tax deductible if you finance your coverage outside of your superannuation. Having income protection premiums be tax deductible makes income protection insurance cover more budget-friendly. On the other hand, if you pay for your insurance through your super fund, the premiums are generally tax-deductible for the superannuation fund.

Assessing Your Needs and Financial Situation

Before diving into the decision-making process, consider your specific needs and circumstances:

Health and Lifestyle: Reflect on your overall health and lifestyle. Are you more susceptible to illnesses or injuries due to your profession or hobbies?

Family and Dependents: Consider your family’s needs. Do you have dependents who rely on your income? Their well-being should be a key factor in your decision.

Emergency Fund: Is your emergency fund sufficient to cover several months of expenses in case of an income disruption?

Next, assess your current financial situation:

Existing Savings: Take stock of your savings, emergency fund, and any other financial resources you can rely on during a period of income loss.

Fixed Expenses: Calculate your monthly fixed expenses, such as mortgage or rent, utility bills, groceries, and insurance premiums. This will help you determine how much income you need to replace.

Debts: Consider your outstanding debts, including credit card balances, loans, and other financial obligations.

Employer Benefits: Review any benefits offered by your employer, such as sick leave and long-term disability coverage. These can impact the level of coverage you need.

Economic Challenges

Given the economic challenges and uncertainties in today’s world, income protection insurance takes on added importance:

Job Security: Assess the stability of your job or industry. If your employment is less secure, income protection becomes more critical.

Inflation: Consider the impact of inflation on your financial needs. The cost of living can rise over time, so ensure your insurance coverage keeps pace.

Comparing Insurance Providers and Policies

Income protection insurance policies in Australia can be a complex landscape, characterised by variations in factors like insurance premiums, exclusions, waiting periods, benefit periods, and the percentage of income paid out upon a claim. To secure the best deal, it’s imperative to proactively explore and compare your options, empowering yourself with the policy that aligns most effectively with your financial security goals.

While several websites allow you to compare insurance policies from different providers, the search results typically do not provide a comprehensive list of income protection insurance providers.

When assessing income protection insurance options, it’s vital to factor in the following elements:

Monthly Benefit: This represents the crucial lifeline of financial support you’ll receive in monthly payments in the event that you’re unable to work due to an illness or injury.

Waiting Period: The waiting period is the duration you must endure before you become eligible to start receiving your monthly benefit.

Benefit Period: It signifies the span of time throughout which you can rely on the monthly benefit to cover your financial needs.

Occupation Rating: Depending on your profession, certain insurance providers offer varying levels of coverage and premiums. Evaluating this aspect is pivotal for aligning your policy with your occupation.

Premiums: Understanding the financial commitment you’ll need to make for the insurance policy is crucial. It directly affects your monthly budget and long-term financial security.

Coverage for specific conditions: Income protection policies cover a wide range of illnesses, conditions, and situations. Ensure that the policy you choose covers your specific needs and circumstances.

Exclusions: Knowing the specific conditions or situations not covered by your insurance policy is essential to avoid surprises in times of need. It allows you to make informed decisions regarding your coverage.

Tax deductibility: Generally, income protection insurance premiums outside of your superannuation account are tax-deductible. Income protection policies held outside of superannuation normally offer a higher coverage amount and offer more features and benefits.

Additional Benefits: Some insurance policies go the extra mile by offering supplementary advantages, such as rehabilitation services or a death benefit. Exploring these added perks can enhance the overall value and support provided by your insurance policy.

How do you process claims?

In the realm of life insurance, the ultimate goal is to safeguard your financial well-being and maintain peace of mind. While we all hope to never find ourselves in a situation where a claim is necessary, should the need arise, the key to a smooth and hassle-free process lies in swift action.

Initiating the claim process early, by reaching out to your trusted Financial Adviser, sets the stage for them to proactively engage with your insurer, ensuring you receive the protection you deserve.

Roadmap of the Step-by-Step Process on How to Process Claims

Step 1: Review Your Policy

Make sure you understand the terms, conditions, waiting period, benefit duration, and any exclusions. Familiarise yourself with the specific requirements and eligibility of your policy.

Step 2: Inform Your Insurance Company

Notify your Financial Adviser as soon as you need to make a claim. They will act on your behalf, commence the claim with your insurer, and obtain the necessary claim forms and guidelines.

Step 3: Medical Documentation

Gather essential medical documents, including certificates, reports, and records, to support your claim.

Step 4: Complete Claim Forms

Complete the claim forms provided by your insurer accurately and add any financial or medical information that is requested.

You may also be requested to collect all relevant supporting documents, which may include:

  • Certificates and medical records
  • Your employer’s statements
  • Pay slips and tax records
  • Proof of income before your disability
  • Any additional documentation required by your policy

Step 5: File Your Claim

Your Financial Adviser will lodge your completed claim forms and accompanying papers to your insurer, making sure to save copies for your records.

Step 6: Await Assessment

Your insurer will review your claim and make a decision. This process may take some time but your Financial Adviser will follow up to ensure your claim is assessed promptly.

Step 7: Receive a Decision

Following evaluation, you will either obtain benefits or be denied. Follow any additional instructions or appeals as needed – your Financial Adviser can help you complete any additional requests.

Step 8: Continued Compliance

If your claim is authorised, you must continue to meet the terms of your insurance to receive continuous benefits.

The Bottom Line

Income stability is crucial in an unpredictable world. Income protection insurance provides a critical safety net, but the best policy is dependent on your specific circumstances. Before making this crucial decision, consider your needs, understand the waiting periods and benefit periods, and compare multiple insurers. Your financial well-being is at stake, and making the correct decision can make all the difference. By carefully weighing these factors, you can obtain peace of mind and safeguard your financial future. Make the wise decision immediately and get income protection insurance that is actually personalised to you.

At Coastal Advice Group, we’re committed to empowering you to choose an Income Protection Insurance plan that not only optimises cost but also provides comprehensive coverage, safeguarding your financial security and instilling unwavering confidence during challenging times. Your financial future deserves nothing less.

Protect Yourself and Your Loved Ones with Coastal Advice Group 

Life insurance is an important investment to ensure the financial security of you and your loved ones in the face of unexpected events. By understanding how your personal insurance impacts your future, you can make informed decisions when choosing the best policies and coverage for your needs.

Seeking the advice of an experienced Wealth Protection Adviser who specialises in insurance can make it easier for you to find the most comprehensive and cost-effective options.

Do you need specialist insurance advice from a professional financial adviser? Coastal Advice Group is here to help you.

Call us or book online to secure your consultation with us today and get started!


DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

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