How Does Income Protection Insurance Work

Many people take out insurance for assets like their home and their car but neglect to insure their most valuable asset – themselves. For most of us, our ability to earn an income is our most valuable asset.

Income protection insurance provides you with cover if you’re temporarily unable to work due to illness or injury. It can provide you with the peace of mind that you’ll still be able to pay your bills while you’re recovering.

It is especially important for self-employed people to have income protection insurance. If you work for an employer, you may have default income protection insurance cover through your super fund, although this is not always the case.

Standard income protection policy terms and conditions

Most income protection insurance policies insure up to 70% of your gross income for a specific time period or until you reach a certain age. For example, for up to two years (or until you return to work, whichever is sooner), or up until you reach age 65.

Most policies have a waiting period between 30 days and 90 days before you’re entitled to receive a policy benefit.

It’s important to read an income protection insurance policy’s product disclosure statement (PDS) before you buy, so that you know the terms and conditions of the cover that you’re buying. Insurers in Australia are legally required to supply you with a PDS before you decide, whether you decide to take out an insurance policy or not.

How much does income protection insurance cost?

This will depend on a range of factors, including:

your age (income protection policies will generally be more expensive the older you are because you’re more likely to suffer an illness),
your medical history (you’ll pay a higher premium if you’re assessed by the insurer as being a higher risk of making a claim),
your occupation (especially if you have a high-risk job),
the amount of cover you need or want (a higher percentage of your income will cost more),
the length of the coverage (for example, income protection up to 2 years will be less expensive than cover up to age 65),
the waiting period before you’re eligible to receive policy benefits (policies with shorter waiting periods are normally more expensive), and
whether the policy has stepped or level premiums. The cost of a policy with stepped premiums increases at each renewal due to CPI and the increased risk associated with age and the cost of a policy with level premiums increases with CPI only. Level-premium policies are typically more expensive in the early years than stepped-premium policies, however, it can be more cost effective in the long term to have a level policy.

How much income protection insurance do I need?

This also depends on a range of factors, such as:

your income,
your individual financial circumstances (for example, whether you have significant debts such as a mortgage that requires regular repayments),
whether or not you have financial dependents (such as children), and
whether or not you have significant sick or annual leave balances that could potentially tide you over in an emergency. However, using your annual leave for income protection purposes obviously means you won’t get to use it for fun purposes like taking a holiday.

It’s important to understand that if you do have default income protection cover through your super fund, the above factors are not considered. Instead, the sole determinant of your level of cover is your income.

Are income protection insurance premiums tax-deductible?

Yes, unless the policy is through your super fund. If you take out a policy outside of superannuation, you can deduct the cost of the premiums from your income on your annual tax return. That means you’ll pay less tax.

On the other hand, if you make a claim on an income protection insurance policy, any benefits that you receive will need to be added to your taxable income. This applies for income protections policies both inside or outside of super.

How we can help

At Qi Wealth, our experienced, expert team of insurance specialists can help you to understand any income protection insurance needs that you may have. We’ll take the time to understand your individual circumstances so that we can provide you with the best possible advice. We develop long-term, trusted relationships with our clients.