Income Protection

How does income protection work?

In the event of a claim, the insurer will pay an amount (normally up to 75% of your gross salary in Australia) until you have recovered sufficiently to work again, or up until the maximum benefit period as stated in the policy; 2 years, 5 years or up to age 65.

How much income protection cover do I need?

The question is, how much of my current income could you live without if you couldn’t work for a period of time.

For most people, the answer is very little.

The income protection cover levels offered by insurance companies are determined by your salary.

In general, the maximum amount of cover you are eligible for is as follows:

  • If you are employed 75% of your current gross salary (including employer packaged fringe benefits and superannuation contributions).
  • If you are self employed you can generally insure your drawings from the business plus things like dividends, payments you make to superannuation, income split with your spouse for tax purposes and your share of depreciation. You can read more about this here.
  • If your income is above certain limits (for example, over $250,000), a lower percentage of income may apply.
    Maximums to the monthly benefit sum insured may also apply.

Things to consider:

  • Costs of meeting your debts (mortgage, etc.)
  • Providing sufficient funds for a spouse, children or other dependents
  • Maintaining your assets & investments

What is income protection insurance?

In the event you can’t work due to illness or injury, income protection insurance aims to protect your income by providing you with an income stream.

What should I pay for income protection insurance?

Income protection premiums vary greatly depending on the level of protection you are after.

As a general rule, income protection in Australia costs approximately one week’s salary per year (approximately 2% of your annual salary). And when it comes to tax time, premiums are generally tax deductible. To find out if this is the case for you, seek out advice from a tax professional.

The following factors also influence your income protection premium:

  • Age – the cost of obtaining cover generally increases over time
  • Gender
  • Health and pre-existing conditions
  • Whether or not you smoke – If you currently smoke, or have smoked within the last 12 months you will pay more in premiums compared to a non-smoker. If you already have a policy and premium based on smokers’ rates and you have not smoked in the last 12 months, you may be eligible for a non-smoker’s premium.
  • Occupation – If your occupation is hazardous or high risk, you will pay a higher premium compared to someone who works in an office.
  • Waiting period – how long you can be off work before you require the income to commence. The waiting periods generally range from 2 weeks to 2 years.
  • Benefit Period – The maximum length of time the policy will provide you with an income stream, following the waiting period. These can either be for a set period (2 years, 5 years) or until a certain age (to age 65). If you have recovered from your sickness or injury and are able to return to work, then the monthly benefit will cease at the time of your return.
  • Additional policy features – comprehensive cover, basic cover or any additional features will also affect the policy premium.

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