Purpose: To cover the essential costs of daily living if you become unable to work
This provides a benefit of up to 75% of your income if you become ill or unable to work due to accident or injury. Depending on the situation, benefits can continue to be paid until age 65. Premiums are generally tax-deductible if cover is held outside of super.
WHAT IS INCOME PROTECTION?
Income protection replaces your income if you cannot work due to sickness or injury. It is important because your income is what funds your life today and your plans for tomorrow.
When you think about what life would be like without your regular income, your earning capacity becomes possibly your greatest asset. Chances are, you’ve based the achievement of your goals and ambitions on having a regular cash flow. If you became ill and were unable to work and maintain that cash flow, your goals may no longer be achievable.
Income protection insurance pays you a monthly benefit and generally covers up to 75% of your pre-tax salary or taxable income (net of expenses) and can be owned individually or inside of superannuation. The premium is tax deductible.
The premium for an income protection policy depends on many factors as follows:
- Occupational duties
- Monthly benefit amount
- Policy Structure (see below)
An income protection policy is available in a standard or comprehensive version, with the comprehensive policy providing a greater range of features and benefits.
The policy will also provide the option of structuring your benefit as “agreed value”’ or “‘indemnity’. Agreed value provides you with a certainty of future benefits, whereas the indemnity benefit is not guaranteed. The indemnity benefit provides a premium discount and is generally suited for those persons with a stable income (e.g. regular salary earners). Please note that where an income protection policy is owned within ‘superannuation’, then indemnity is the only option available.
You will also have the choice of paying a “stepped premium”, where the cost of the cover will increase yearly with age, or structuring as a “level premium”. You will pay more initially for the level premium option; however the benefit will generally be a lower overall premium if the policy is held for the long term.
All income protection policies have a waiting and benefit period and these can be structured to suit your individual needs and budget. Longer waiting periods can be suitable where sick-leave entitlements or other ongoing income is payable in the shorter term. A longer benefit period provides greater protection.
The range of waiting and benefit periods are generally as follows:
Waiting Periods: 14-days, 30-days, 60-days, 90-days, 180-days, 1-year & 2-years.
Benefit Periods: 2-years, 5-years, Age-55, Age-60, Age-65 and Age-70.
Note: Not all of the above waiting and benefit periods are available with every company and we would be happy to discuss your personal situation and provide you with a recommendation.