What is Income Protection Insurance?
This insurance is designed to replace your income if you are unable to work due to sickness or injury. It provides a monthly payment of usually up to 75% of your pre-tax income. Its purpose is to provide you with a regular income to help you cover your living expenses so you can focus on your recovery. Some policies also include additional payments for things like rehabilitation and home care.
Not many people risk being uninsured when it comes to their car or home. But many choose to not insure their most valuable asset – that is, their ability to earn an income.
This is despite the fact that most people will earn a fortune between now and when they retire:
How much will you earn from now until retirement+?
+Assumes income increases each year by 4%. Retirement age of 60.
This means that most families are carrying significant financial risk should the unexpected happen. The big question you have to ask yourself is:
‘Would your family be able to maintain their lifestyle if you suddenly couldn’t earn an income due to a serious illness or accident?’
If your answer to this question is no, you need to consider transferring that financial risk to an insurance company.
Your financial adviser can help you do that, as well as answer any questions you have about income protection insurance, and then calculate how much you need to safeguard you and your family in the event something should happen to you or your spouse.
And, if you wish, your adviser will use our sophisticated computer program to ‘broker’ the major insurers to find
you the right cover at a competitive price.*
What are the taxation implications?
The premiums for income protection insurance are tax deductible for most people. However, the payments paid to you by the insurance company are regarded as personal income and taxed accordingly.
Who can qualify for income protection insurance?
You must be employed or self-employed and earning an income to qualify.
What are the basic policy options?
You can generally choose the waiting period (this is how long you must be unable to work before the insurance begins to pay you) and the benefit period (how long the policy will pay you if you are unable to work).
The cost of this insurance decreases the longer the waiting period you choose, and the shorter the benefit period you choose.
What if you already have income protection through your employer?
Some people have basic income protection insurance through their employer.
But this insurance generally pays a benefit for a maximum period of only two years and is a basic type of cover.
This means if you are unable to return to work after two years you may not have a source of income.
In some instances it may be appropriate to take an additional policy with a benefit period up to age 60 or 65.
Types of policies
- ‘Agreed value’ versus ‘Indemnity’ cover
‘Agreed value’ cover will pay the predetermined sum insured, no matter what your income is at the time of the claim.
‘Indemnity’ cover will pay whatever is the lesser amount between your sum insured and your income at the time of claim.
*Insurance cover is subject to eligibility criteria.
- ‘Hours based’ versus ‘duties based’ versus ‘loss of income based’
‘Hours based’ policies pay benefits if you are unable to perform your regular duties, but will allow you to work up
to 10 hours a week without reducing the payment.
‘Duties based’ pay benefits if you are unable to perform one or more of the regular duties of your regular occupation.
‘Loss of income based’ policies pay benefits if you suffer a loss of the majority of your income (usually 80%) as a direct result of your illness or injury.
Choice of premium options
‘Stepped’ premiums increase each year in line with your age.
‘Level’ premiums generally remain constant until you’re 65 or 70, depending on which ‘Level’ premium option you have selected, at which point they convert to ‘Stepped’.
In other words, Stepped’ premiums are more affordable in the early years, while ‘Level’ premiums tend to be more affordable in the later years (before they convert to ‘Stepped’).
How do the insurance companies view you as a risk?
Some insurance companies may charge you significantly less than other companies for the same cover, simply because they see you – or your occupation – as a lower risk. That’s why you should use a financial adviser who has the ability to ‘shop around’ the reputable insurers to get the best solution for your particular situation.
Steve and Petra have two children at school. They both work and they have a mortgage. They have a comfortable lifestyle but would struggle financially if one of their incomes was lost. We would recommend that both Steve and Petra purchase income protection policies which pay 75% of their pre-tax salaries up to age 65. We would recommend different waiting periods as their work circumstances are different. If one of them were to suffer a serious injury or illness, that partner’s salary would be almost replaced by the insurance benefit – and therefore they could concentrate on getting better rather than worrying about where to find the money to pay the bills.
Who is Australian Unity Personal Financial Services?
We specialise in providing professional strategic advice to help you improve your current financial position and ultimately achieve your long term lifestyle goals.
Importantly, our initial advice isn’t a ‘set and forget’ service. Instead we offer you regular financial mentoring and ongoing guidance – in all aspects of your personal finances – to set you, and keep you, on the path to financial wellbeing.
Our team of experienced financial professionals can provide you with a detailed and totally tailored blueprint for financial success in any or all of the following areas:
- Financial advice
- Wealth creation
- Retirement planning
- Home loans
- Commercial loans
- Investment loans
- Equipment finance
- Car finance
- Personal estate planning
- Business estate planning
- Personal risk insurance
- Business risk insurance.
Australian Unity has a proud 170 year heritage of helping Australians create secure financial futures. This pedigree and experience, combined with our corporate strength and leading edge strategic advice capability, means we are uniquely placed to offer you high quality personal financial services… each finely tuned to your particular needs to ensure you achieve your vision of a secure financial future.
After all, your financial wellbeing is at the heart of everything we do.
Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is not a registered tax agent. If you intend to rely on any tax advice in this document you should seek advice from a registered tax agent. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in November 2013. © Copyright 2013.