Unfortunately very few Australians have sufficient, if any, income protection insurance. The primary reason for this is that income protection tends to be confusing and people are hesitant to purchase something if they don’t understand the benefits. This latest post attempts to demystify Income Protection insurance and explain why, in our opinion, it is arguably the most important type of personal insurance.
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What is Income Protection Insurance?
Income Protection would probably be easier to understand if it was renamed Income Replacement insurance. It replaces income lost if you are unable to work due to accident or illness.
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Do I need Income Protection?
The easiest way to answer this question is ask another one.
How long would you last if, without warning, you suddenly stopped receiving your income?
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How much do I need?
How much of your current income are you putting away in savings? If the answer, like most Australians is “very little”, then you arguably need 100% of your current income. That said, if you’re like most Australians, you probably also spend a good portion of your income on things that, if necessary, you could go without.
Income Protection policies will cover up to 75% of your gross (pre-tax) income plus, in most cases, an allowance for the Superannuation payment made by your employer. So unless you know you could live on less than 75% of your current income, this is the amount of cover you probably need.
It’s also important to remember that the benefit received from an income protection policy is taxed just like your regular income.
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How much does it cost?
The cost of Income Protection depends upon a large number of variables.
However, the first thing to point out is that Income Protection premiums are tax deductible. E.g. if the income protection premiums were $1,000 per year and you pay 37% tax, then you effectively only pay $630 for your income protection.
As with all types of life insurance, factors such as your age, gender, smoking status and medical history influence how much you pay for insurance. However, income protection premiums are also affected by the following:
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Waiting period
The waiting period is the amount of time you must be unable to work before the insurance company will make a payment. Waiting periods can be as little as 14 days or as long as 2 years.
The shorter the waiting period, the higher the premiums, because the greater the likelihood you will make a claim.
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Benefit Period
The benefit period is the amount of time the insurer will continue to pay you while you are unable to work. Benefit periods can vary from 2 years to Age 70.
The longer the benefit period, the higher the premiums, because the insurance company has a higher risk if you are unable to work for an extended period of time.
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Occupation
Occupations considered higher risk attract higher income protection premiums. For example, an accountant will pay a lot less for the same amount of income protection as an electrician working underground on the mines.
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Inflation Protection
Imagine if your boss told you tomorrow you would receive the same pay you are on today for the rest of your career.
If you’re earning $100,000 today, in 20 years time you’ll need to earn $180,000 to achieve the same standard of living.
Inflation protection ensures your Income Protection benefit goes up every year. It costs more for this benefit, but it is extremely important.
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It’s important to shop around
With so many variables influencing the cost of Income Protection, it’s important to shop around. Income Protection premiums can vary widely from one insurer to the next, especially for higher risk occupations.
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How we can help
Our life insurance specialists are experts at obtaining the best quality cover at the best possible price.
Because Income Protection is so closely tied to your occupation and your ability to work in that occupation, it is often possible to negotiate a more favourable outcome. We have access to all the leading Australian life insurance companies and can tell you which insurance company is best for your occupation and unique needs.
Contact us today and, we can arrange some income protection quotes for you.