If you’re someone who runs their own business or has loved ones who depend on your income, you’ll want to have a backup plan in case something goes wrong. Income protection insurance is a type of life insurance designed to keep your income stream flowing if you’re unable to work due to a long-term injury or illness. Locking in the right policy not only means you’re covered for a range of events but can also bring peace of mind to you and your family.
What does income protection insurance cover?
An income protection insurance policy covers you for partial or total disability caused by injury or illness that renders you unable to work. What you can receive as an ongoing benefit varies from insurer to insurer. In most cases, this is up to 70% to 75% of your average monthly pre-tax income, maxed out at a limit of between $10,000 and $20,000.
Each insurer will have its own definition of disability and injuries, illnesses and circumstances that can and can’t be covered. Some of the common exclusions for income protection insurance are:
- Self-inflicted injuries
- Normal pregnancy and maternity leave (however, if you suffer from long-term complications relating to your pregnancy, you may qualify for coverage)
- Some elective surgeries
- Injuries or illnesses caused by misuse of alcohol or drugs
- Injuries or illnesses caused by illegal activity
- Injuries or illnesses caused by war or civil unrest
How income protection fits into life insurance
Income protection is just one form of life insurance that might make up a set of multiple policies you hold. It’s important to understand what each type of life insurance covers so you can determine what protection you really need:
- Term life cover: the standard form of life insurance, this provides your nominated beneficiaries with a lump sum if you pass away or are diagnosed with a terminal illness. You can choose from as little as $50,000 to $100,000 up to as much as $25 million in cover with some insurers.
- Total and permanent disability (TPD) cover: this covers you for a lump sum payment if you’re permanently disabled due to a covered injury or illness. You can choose either any occupation cover, meaning you’re no longer able to work in any position suited to your experience or training, or own occupation cover, which means you’ll have to change jobs but can still work in an industry suited to your experience or training. The maximum benefit will usually range from $1 million to $3 million.
- Trauma cover: this type of cover insures you for a lump sum payment if you’re diagnosed with a critical illness or suffer a significant injury. You can potentially insure yourself for as much as $2 million under this policy.
If part of your reason for taking out income protection insurance is to cover medical expenses, consider whether your private health insurance policy can also help you do that.
Who needs income protection insurance?
Income protection insurance can offer valuable cover for a wide range of people. Here are a few situations where you might decide you need income protection insurance:
- You’re a sole trader without any access to paid leave
- You have dependants, such as a partner or children, who rely on your income
- You’re working in a job or industry that carries a higher risk of injury or illness, such as on a building site
- You’re currently paying off a significant debt, such as a mortgage or car loan
Life insurance providers you can compare with Savvy
We’ve partnered with Compare Club to bring you a range of life insurance policies to help you compare them side by side.
How much is income protection insurance?
The cost of your income protection insurance policy will come down to a range of factors specific to you and the coverage you’re after. These include:
- Your age: you’re likely to pay more as an older person compared to someone younger.
- Your job: if you’re exposed to more physical risks in your job, your premiums will be higher compared to someone in a desk job, for instance.
- Your income: naturally, the more your insurer agrees to pay out if you make a claim, the more you’ll have to pay for your premiums.
- Your waiting period: this is the period during which you’ll have to wait before receiving your income protection. For example, you may have to wait 90 days from your confirmed disablement before you can receive your sum insured or you could pay more to bring this forward to 30 days.
- Your medical history: those with an extensive medical history can expect to pay more for income protection than someone with a clean bill of health.
- Your lifestyle: if you’re a smoker or enjoy high-risk hobbies, these will likely be reflected in a more expensive premium.
- Your choice of premium type: you can choose between variable age-stepped (stepped) and variable (level) premiums on your policy. While variable age-stepped premiums are based on your age and will likely increase as you get older, variable premiums aren’t based on your age and won’t go up by as much each year. This means that you’ll probably pay less on variable age-stepped premiums when you’re younger and less on variable premiums when you’re older.
Why compare life insurance through Savvy?
Income protection insurance: standalone policies vs superannuation cover
In many cases, you may already be covered by an income protection insurance policy offered through your superannuation. These are usually cheaper than standalone policies and don’t require you to go out of your way to pay for them, with premiums deducted from your super balance. Also, because super contributions are taxed at 15%, it may be a more tax-effective way to pay for your income protection insurance.
However, there are some important things to consider when it comes to income protection insurance through your super. Firstly, cheaper doesn’t necessarily mean better. It’s important to read through the policy’s PDS carefully and work out what it covers. In many cases, its inclusions and benefits will be more limited than what you’d receive when buying a standalone policy.
Also, if your super is left dormant for 16 months, your insurance can be cancelled by your super fund. This means that you’ll always need to be wary of making contributions to ensure your policy doesn’t lapse. Finally, you’ll want to consider whether it’s worth eating into your super balance to pay for your coverage.
The pros and cons of income protection insurance
Pros
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Provides a revenue source if you can’t work
If you're unable to return to work due to an injury or illness, income protection insurance can help you continue to pay the bills for an extended period.
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Flexible coverage
Income protection insurance is reasonably flexible in terms of sum insured, period insured and waiting periods, allowing you to tailor your policy depending on you and your family's individual needs.
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Tax-deductible premiums
Your income protection policy premiums are generally tax-deductible, which could allow you to claim back what you've spent at tax time. This only applies to income protection coverage outside superannuation.
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Greater peace of mind
You can be more secure in the knowledge that your funds won’t entirely dry up if you suffer from a covered injury or illness, enabling you to focus on your recovery.
Cons
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Not all health issues are covered
As with all insurance, companies will outline a list of exclusions, meaning there’ll be some circumstances where you wouldn’t be covered for your injury or illness.
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Pre-existing conditions may cost you more
If you have a pre-existing medical condition, you're likely to pay a higher premium, as your insurer may deem you to be at a greater risk of making a claim.
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May not deliver benefit if you’re able to work before waiting period ends
For policyholders who select a longer waiting period, the benefits you end up receiving might not actually be worth it. For example, if you’re off work for three months and have a 90-day waiting period, you probably won’t receive any funds through your income protection policy.
How to apply for income protection insurance through Savvy
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Fill out a quick online quote
Share relevant information about yourself and the policy you’re after, such as your date of birth, contact information, whether you smoke, your job and how much coverage you need.
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Speak with a trusted life insurance specialist
Once you’ve completed the form, a life insurance specialist from our partner Compare Club will be in touch with you to discuss your income protection insurance options.
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Purchase your policy
If you're happy with the coverage they’ve found for you, you can go ahead and complete the purchase through your insurance specialist. It really is that easy!
Top tips for locking in the best income protection insurance
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Work out how much cover you need and for how long
Take the time to plot out how much you might need each month if you weren’t able to work for a while. If your partner is a high income earner, for example, your sum insured might not need to be as high.
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Consider your policy’s inclusions and exclusions
You should also know exactly what is and isn’t covered by your income protection insurance. The best policies won’t deliver any unwanted surprises when the time comes to make a claim.
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Compare different premiums
Of course, comparing the cost of different income protection insurance policies is essential. Picking the first one you find might mean you’re leaving a better deal on the table.
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Choose the most suitable waiting period
It’s worth considering what waiting period is best for your situation. For example, a 90-day waiting period may deliver the cheapest premiums, but the least value if you’re only off work for a couple of months.
