Income Protection

Whether you are single, married, working full time or part-time, your income allows you to enjoy a certain quality of life and you don’t deserve to lose the lifestyle you have worked hard for because of something unexpected. Depending on your situation, Income Protection cover generally provides up to 75% of your income in the case of an accident or illness. This cover can continue up until the age of 65, when you can access your superannuation. The length of time you receive payments depends on the contract term; for example two years, five years, or up to age 60 or 65; it varies depending upon the amount of cover you are willing to pay for.

How much do I need?

The amount of income protection insurance you need will be determined by the salary you want to insure. Generally income protection provides cover for about 75% of your salary in the event of illness or injury preventing you from working.

You need to consider what the costs are of meeting a mortgage and other debts; providing for a spouse, children or other dependents; and maintaining your assets and investments. Remember the point of income protection insurance is to provide an income stream if you can no longer work.

What should I pay?

Premiums are set depending on:

• Age (premiums may increase or cover decrease as you get older);
• Gender;
• Health and pre-existing conditions;
• Whether or not you smoke;
• Occupation (for example, a manual laborer pays different premiums to an office worker); and
• The time you choose to wait before receiving payment.

Prices vary depending on age and other factors, but income protection can cost around one week’s salary per year. The premiums you pay on this type of policy are tax deductible. However, payments you receive under the policy are classed as assessable income for tax purposes.

Tips and traps

This isn’t an exhaustive list, so consider getting professional financial advice.

• When taking out a policy, ask these key questions: what’s covered; what’s not covered; how much will I be paid after a claim; and what will the insurance premiums cost now and later?
• Consider getting a policy with index-linked premiums and cover so you know the cover will keep up with inflation.
• Consider a non-cancellable policy; otherwise companies may reassess your health or other factors on each renewal, possibly raising your premiums or refusing to continue cover.
• Offset clauses allow most insurers to reduce payouts if you have other income (for example, sick pay from your employer or Centrelink benefits). Check the relevant section of the policy for details.
• With group insurance provided through super: the agreement is between the fund trustee and insurer. Make sure both know who your nominated beneficiaries are.
• Check the waiting period (how long before you receive payment, often 30 or 90 days) and the benefit period (for how long payments will be made — typically two years or sometimes until your normally expected retirement age).
• Some policies pay out if you’re unable to perform your normal occupation; others only pay if you can’t perform any occupation for which you’re suited by education, training or experience.

To find out how much Income Protection cover you need, let us help you find an adviser near you.