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What Is Income Protection Insurance & Is It Worth Protecting My Greatest Asset?

What is Income Protection Insurance & Is It Worth Protecting My Greatest Asset?

Did you know that income protection insurance provides you with monthly payments if you are unable to work when you become ill or get injured?

It is a financial product designed to provide financial support and help you meet your financial commitments with a monthly benefit. Income protection insurance in Australia is a wise investment if you have dependents, monthly living expenses or debt obligations.

In this article, we’ll dig deep into the nuances of “what is income protection insurance?” and answer your questions regarding IP insurance from cost to cover, from need to taxes, and everything else in between.

What is Income Protection Insurance?

An income protection policy is a type of life insurance that provides financial support to the policyholder in case of total or partial disability due to illness or injury.

Income protection cover is designed to replace the policyholder’s income and cover living expenses, such as mortgage repayments, bills, and other financial obligations, while they are unable to work. It may be purchased through a financial adviser, an insurance company, or via your super fund.

Importance of Income Protection in 2024

The current Australian economy has increased the need for income protection insurance and will form a crucial part of your financial plan for many. Especially, since its benefits are paid monthly when a person is unable to work due to illness or injury, helping to cover essential living expenses and maintain household income – which is becoming harder to do, due to the increased cost of living.

In the face of uncertainties, an income protection policy may play a crucial role in safeguarding individuals and their families against the financial impact of unexpected events, making it a valuable consideration in the current economic climate.

The self-employed, sole-income providers and those at higher risk of workplace injury may also greatly benefit from income protection.

Understanding Income Protection Insurance

Even though it’s important, only 31% of Australians have income protection insurance. This shows that more people need to know about and understand its benefits and how it works.

How Income Protection Works

An income protection policy provides monthly benefit payments of up to 70% of pre-disability income to individuals unable to work due to illness, injury, or disability.

The benefit period for most income protection insurance policies is 2 or 5 years or up to a certain age. Insurance premiums will be higher the longer the benefit period.

The waiting period, or time to wait before payments start, may be between 14 days and two years. In general, longer waiting periods mean cheaper premiums. When choosing a waiting period, .you may consider your sick and annual leave, savings, and emergency funds.

To be eligible for income protection insurance, you must be employed and earning an income. You will also need to meet the insurer’s eligibility criteria. The insurer may also require a medical assessment and may have exclusions for certain medical conditions or injuries.

The eligibility criteria for Australian income protection insurance may vary depending on the insurer, but generally, you must be between 18-60 years old, a citizen or permanent resident of Australia or a New Zealand citizen residing permanently in Australia, and working for more than 20 to 30 hours per week depending on your occupation.

The Pros and Cons of an Income Protection Policy

The benefits of income protection insurance include:

  • Replacement of lost income: If you become ill, injured, or disabled and are unable to work, income protection insurance may replace a portion of your lost income.
  • Peace of mind: Knowing that you have income protection insurance may provide peace of mind, knowing that you and your family will be financially secure if you are unable to work.
  • Tax benefits: Income protection insurance premiums paid personally are tax-deductible in Australia, which may help to reduce your overall tax liability.

The drawbacks of income protection insurance include:

  • Cost: Income protection insurance cost may eat into your cashflow, especially if you are in a high-risk occupation or have pre-existing medical conditions.
  • Waiting periods: There is usually a waiting period before the benefit is paid, which may range in duration from 14 days to 2 years.
  • Exclusions: Income protection insurance may have exclusions for certain medical conditions or injuries, which may limit your coverage.

Income Protection Insurance Coverage

Income protection insurance policies typically cover 70% of the insured’s monthly income, typically up to $10,000 per month. Some Australian income protection policies may pay up to 90% of pre-tax income for the first six months and up to 70% after that.

So what does income protection insurance cover? Income protection insurance covers the following:

  • Income Replacement: It is designed to replace up to 70% of your pre-tax income if you are unable to work due to illness or injury.
  • Rehabilitation Costs: Some policies may cover rehabilitation expenses to help you recover and return to work.
  • Partial or Total Disability: It pays part of your lost income if you’re unable to work due to partial or total disability.
  • Waived Premiums: Insurance providers waive the premiums while you’re receiving monthly benefits.

Note that when choosing and comparing income protection policies, it’s important to critically analyse and review the specific policy’s product disclosure statement (PDS) for the details of what is covered and any exclusions.

Is Income Protection Insurance Tax Deductible?

Income protection insurance premiums paid personally are generally tax-deductible in Australia. According to the Australian Taxation Office (ATO), if a portion of the premium paid relates to income protection insurance, that specific part is tax-deductible.

However, if the income protection premiums are arranged through superannuation, they are not eligible for tax deductions.

Outside of premiums, is income protection tax deductible?

It’s important to note that any benefits received from an income protection insurance policy are usually considered taxable income and must be reported in your annual tax return.

This tax treatment is different from other forms of insurance such as total and permanent disability (TPD) and critical illness or trauma insurance, where the benefits are generally tax-free.

Therefore, while the premiums are tax-deductible, the benefits are taxable. It’s recommended to consult with an insurance adviser to understand the specific tax implications based on individual circumstances.

Do I Need Income Protection Insurance?

Whether you need it depends on various factors such as savings, dependents, lifestyle, and other financial resources. Here are some insights into the factors influencing the decision to invest in income protection:

  • Employment Benefits: If you have a permanent job with benefits like sick leave and annual leave, you may have some protection already. However, if you are self-employed or casual, an income protection policy may be a valuable safety net.
  • Savings and Financial Resources: If you have substantial savings or other income to support you while unable to work, you may not need income protection. Income protection policies are important if one doesn’t have an emergency fund or relies solely on regular pay.
  • Costs and Policy Options: The cost of income protection policies may vary depending on factors like your age, income, job risk, and lifestyle. It’s important to consider the waiting period, and benefit period carefully, and the percentage of income paid out upon a claim when evaluating policy options.
  • Individual Circumstances: Everyone’s situation is unique, so it’s essential to assess your own needs and circumstances when deciding whether to invest in income protection.

Is Income Protection Worth Investing in 2024?

Income protection insurance may be valuable for individuals who rely on their income to pay bills, especially if they do not have substantial emergency savings, have debts, or are self-employed.

The decision to invest in income protection insurance requires a thorough assessment of your circumstances. Thus, it’s advisable to seek professional advice from an experienced Wealth Specialist Financial Adviser and carefully consider your own needs before making a decision.

Protect Yourself and Your Loved Ones with Central Coast Financial Planning Group 

Investing in life insurance protects you and your loved ones from unexpected events. Knowing how your insurance impacts your future helps you make informed decisions when choosing the best policies and coverage.

Seeking the advice of an experienced Insurance Adviser may 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? Central Coast Financial Planning Group is here to help you.

Call us or book online to secure your initial meeting 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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