Income Protection Insurance Explained

Income protection insurance can provide you with a portion of your regular income if you are unable to work for an extended period due to injury or illness.

Unlike life insurance, which pays a lump sum upon your death or being diagnosed with terminal illness, income protection insurance is all about providing a regular income to keep you and your loved ones financially afloat while you get back on your feet and back to work.

Usually a waiting period applies before any income protection payment is made; that is, you need to be unable to work for longer than the waiting period, and after that, entitlement to income protection benefits  commences. Usually, payments are then made monthly in arrears.

Income protection insurance is designed to help you maintain your financial stability during times when you can’t earn your regular income. The policy pays out a percentage of your income, usually up to 70%, ensuring you can continue to meet your financial obligations, such as mortgage repayments, bills, and daily living expenses.

Key components of an income protection policy include:

• Benefit Amount: The monthly payment you’ll receive, based on a percentage of your income.
• Benefit Period: The duration of time you’ll receive payments, which could range from a few months to several years, or until you reach retirement age.
• Waiting Period: The time you must wait before payments begin after you’re unable to work, typically ranging from 30 days to 2 years.
• Premiums: The cost of the policy, influenced by factors like your age, occupation, and health.

When to Consider Income Protection Insurance

Income protection insurance is particularly important at certain life stages and under specific circumstances:

• Starting a Family: If you have dependents, such as a partner or children, income protection ensures they can maintain their lifestyle if you’re unable to work.
• Taking on a Mortgage: Homeowners can use this insurance to cover mortgage payments, preventing the risk of losing their home if they’re unable to work.
• Self-Employment: Without access to employee benefits like sick leave, self-employed individuals should consider income protection to cover personal and business expenses.
• High Debt Levels: If you have significant debts, income protection ensures you can continue meeting these obligations even when you’re unable to work.

Even if you’re currently healthy, it’s wise to consider income protection as part of your long-term financial planning. Taking out a policy early can help you secure lower premiums and ensure you’re covered in case of an unexpected illness or injury.

How much does income protection insurance cost?

Different product options, levels and lengths of cover bring with them different premiums, so your premiums will vary depending on the type and level of income protection insurance you select. However, your health, lifestyle and occupation will also play an important role in your eligibility for cover and the cost you may pay.

When you apply for income protection insurance, you will generally have to go through underwriting, a process carried out by your insurer that takes into account your personal circumstances (like your age, your occupation, income and any existing health conditions and history) to ensure that the cost of the cover is proportionate to the risks presented by you.

If you work in an occupation that has an increased risk of accident, like in a mining setting, for example, you may find that your premiums are higher than someone working in a lower accident risk environment like an office. You should always check the premiums and the terms of any insurance product before purchase.

Can I afford income protection insurance?

If you are trying to decide whether income protection insurance is worth it for you, you’ll need to weigh up the financial peace of mind and security that the right policy offers against how the premiums would fit into your monthly budget.

To do this, think about what you would do if you were unable to work, where you would draw money from and who relies on your income to pay for regular outgoings. If you had no income for an extended period, would you be able to draw down on savings? Is there another family member who could pick up the slack? Could you keep up with your mortgage and other expenses?  Do you have any sick leave or other leave you could use first, or assets you could sell to access funds?

These questions are personal to you, but are key to determining whether or not income protection insurance is appropriate for you and your family.

Tax deductions on life and income insurance premiums

Each type of life insurance will bring with it tax implications that generally relate to two things – premiums and benefits:

• Premiums – the regular payments you make to maintain your insurance cover. These might be fortnightly, monthly or annual.
• Benefits – the payout you receive if you, or your nominated beneficiary, make an insurance claim.

Generally, life insurance premiums are not eligible for tax deduction. In fact, according to the Australian Tax Office (ATO) the situation is clear cut for most life insurance types:

“You can’t claim a [tax] deduction for life insurance, trauma insurance or critical care insurance premiums.”

However, the rules can differ when it comes to income protection insurance, since this type of cover directly relates to your employment income. 

Generally, income protection premiums can be claimed as a tax deduction by declaring them in your tax return at the end of the financial year. 

PPT are able to confirm whether you are eligible to make these deductions given your specific circumstances. When it comes to reporting your income protection premiums for tax purposes, some insurers will send you a receipt for premiums paid – you will need to report this as part of your tax return. Other insurers will report this information directly to the ATO.

Book an Appointment

To explore how income protection insurance can be tailored to your personal circumstances, contact Risk Insurance Specialist Brent Olszewski at (03) 5331 3711 or email brento@ppt.com.au. It’s never too early to safeguard your financial future.