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Income Protection Insurance: Do You Really Need It?

March 11, 2024 | Insurance

The possibility of losing your income due to an illness or injury is a real concern, and it’s important to consider how you would manage financially if it were to happen. You may need Income Protection insurance to help you maintain your standard of living if you become unable to work due to illness or injury.

In this short guide, we’ll provide an overview of Income Protection insurance, including how it works, its benefits, what it does and doesn’t cover, and whether you may need it.

Income Protection Defined

Income Protection (IP) is a type of insurance that pays a portion of your lost income if you become unable to work for a prolonged period due to a serious illness or injury. This can help you cover living expenses, medical bills, and other financial obligations during your recovery period.

Income Protection insurance is offered by various insurance companies, as well as superannuation funds in Australia.  It is also referred to as ‘salary continuance’ or ‘temporary disability’ cover.

Unlike either Total and Permanent Disability (TPD) insurance or Trauma insurance, which pays a lump sum for disability arising from critical illness or serious injury, Income Protection benefits come in the form of regular payments.

The benefit amount can vary depending on the policy and your circumstances, but it is typically determined either by your income at the time of application or at the time of claim, and payments would be sent for a set period, such as two years, five years, but will not continue once you can return to work.

You can claim a tax deduction for the premiums you pay personally, which reduces your taxable income and the amount of tax you have to pay.

How Does Income Protection Insurance Work?

Income protection policies come in two forms: indemnity value and agreed value.

  • Indemnity value: provides a benefit of up to 70% of your salary – at the time of your claim – and may result in a smaller payout if your salary has decreased since you took out the policy. Evidence of your income is typically provided at the time of claim in this case.
  • Agreed value: provides a benefit of up to 70% of your salary – at the time of application – and while more expensive, may be useful if you have a fluctuating income. Evidence of your income is typically provided at the time of application in this case.

To be eligible for income protection insurance, you are expected to be working and earning an income at the time you take out the policy. You will usually also need to meet certain health and lifestyle criteria.

If you become seriously ill or injured and are unable to work as a result, your insurance provider will ask you to provide evidence of your condition to evaluate your claim – this includes a claim form and reports from your attending doctors. Once your claim is approved, you will begin receiving regular payments until you can return to work or until the end of the benefit period specified in your policy – whichever occurs first.

Keep in mind that income protection insurance policies can vary widely.

Benefits of Income Protection Insurance

Income protection insurance can offer several benefits, including:

  • Income Replacement: Even if you are unable to work and earn an income temporarily due to an injury or illness, Income Protection can provide you with a steady source of funds to help you recover and maintain your standard of living.
  • Flexibility: Most Income Protection policies offer flexibility in terms of payment options, waiting periods, and benefit periods. You can choose a waiting period and benefit period that suits your financial situation.
  • Tax Deductibility: You can usually claim the premiums you personally pay for Income Protection insurance as a tax deduction when you file your tax return.
  • Peace of Mind: You can rest assured knowing that if you become sick or injured and unable to work, you have a financial safety net in place.
  • Return to Work Support: Some Income Protection policies offer return-to-work support services to help you get back to work as quickly and safely as possible after an illness or injury.

What Is Covered?

In general, Income Protection insurance covers a broad range of medical conditions and injuries that affect your ability to work and earn an income.

The specific illnesses and injuries covered can vary depending on the policy and the insurance provider. Be sure to read carefully the policy’s product disclosure statement (PDS) before making a decision.

What Is Not Covered?

The illnesses and injuries specifically excluded from Income Protection insurance also depend on the insurance provider and policy. However, some common exclusions may include:

  1. Pre-existing conditions – illnesses or injuries that existed before you took out the policy
  2. Self-inflicted injuries – if you injure yourself intentionally or harm yourself in any way
  3. Illegal activities – if you become disabled due to an injury that occurred while you were engaging in illegal activities
  4. Drug and alcohol-related injuries – injuries or illnesses related to drug or alcohol abuse
  5. War and terrorism – injuries or illnesses related to war or terrorism.
  6. Pregnancy and childbirth-related disabilities (however, some medical conditions resulting from pregnancy or childbirth may be covered)
  7. Certain medical conditions such as some types of mental illness, stress-related disorders, and back pain
  8. Injuries sustained during certain high-risk activities, such as professional sports or dangerous hobbies

Can Anyone Get Income Protection Insurance?

Most working individuals in Australia are eligible to obtain Income Protection insurance. However, the policy terms and cost of premiums may vary depending on factors such as age, gender, occupation, and health status.

Do I Really Need It? 

Taking out Income Protection insurance is a personal decision, and whether or not you need it will depend on your individual circumstances.

If your salary is your primary source of income, you have dependents who rely on your income, or you have financial obligations such as a mortgage, then getting income protection insurance may be a wise investment. You can sleep soundly knowing that you would be financially prepared in the event that you are unable to work due to injury or illness.

Talk to Coastal Advice Port Macquarie for Professional Insurance Advice

Income Protection insurance can bring you peace of mind in the event that an illness or injury prevents you from working and earning an income. It’s worth considering as part of your Wealth Protection Plan, especially if you have dependents or financial commitments.

By providing a replacement income based on your past earnings, Income Protection insurance can help you maintain your standard of living and cover essential expenses. But as with any insurance policy, it is important to review its terms and conditions carefully and seek advice from a qualified financial adviser who specialises in Wealth Protection if you have any questions or concerns.

Are you seeking life insurance adviceCoastal Advice Port Macquarie offers financial planning services in Port Macquarie and the Mid-North Coast. Our team of experts work closely with their clients to create suitable strategies that offer peace of mind to have the financial lifestyle they desire. Call our office or book online to secure your complimentary first meeting!

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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