Income protection insurance is one of those things that’s absolutely essential for some people, a nice-to-have for others, and possibly unnecessary for a third group altogether. In other words, there’s no one-size-fits-all answer to whether the premiums justify the cost. It really comes down to your circumstances, so it’s worth taking a proper look at what the cover provides and the factors that should shape your decision.
What is income protection insurance?
Income protection insurance is designed to replace your income, based on what you earned in the year before a serious illness or injury that stops you from working. It can pay up to 90% of your pre-tax income for the first six months of your disability, and up to 70% for a further period after that.
Worth noting: you’re only covered if you lose your income for medical reasons, not for redundancy, other employment termination, or taking unpaid leave. Policy terms vary quite a bit, so it pays to read the Product Disclosure Statement closely before you commit.
What does income protection cost?
Premiums vary based on your age, gender, occupation, health, lifestyle, the benefit payment period, how long you choose to wait before payments start, and whether you go with variable or age-stepped premiums. All up, that means the cost can range from as little as $35 a month to over $100 a month. The only way to know your number is to compare quotes for your own situation across several insurers.
Reasons to consider income protection insurance
A safety net. Having a buffer when your income stops, so you can still pay the bills and keep up mortgage repayments, is especially important if you don’t have a big emergency savings fund to fall back on.
You’re self-employed. Small business owners and other self-employed folks, and there are plenty around Newcastle and the Hunter, often can’t lean on sick leave or annual leave if they’re unable to work.
You’re the primary breadwinner with dependants. If you’re the main or only income earner and your family relies on what you bring in, losing that income for an extended stretch could be devastating.
You work in a higher-risk occupation. You’ll pay more in premiums, but being covered when your job carries an above-average risk of illness or injury is genuinely reassuring.
Peace of mind. Financial stress can get in the way of recovering from illness or injury. Protecting your income takes some of that extra anxiety off the table.
Personalised policies. You’re not paying for other policyholders’ potential problems. Your premiums depend on your own situation and the choices you make.
It can be tax deductible. For policies held outside your superannuation account, premiums can usually be claimed as a tax deduction, which effectively brings the cost down.
Reasons you might decide against it
Your age and health. Young, healthy people with no dependants may feel less likely to need this type of cover.
Waiting periods. Some policies have long, fixed waiting periods before you can claim, by which time you might already be back at work.
Exclusions and complexity. Conditions, definitions and exclusions around certain occupations and types of disability can make it harder to claim than you’d expect.
You already have cover through super. Total and Permanent Disability (TPD) cover may be provided automatically through your superannuation, and you may also be able to have Salary Continuance Insurance premiums deducted from your employer’s super contributions. That said, this type of cover tends to be less flexible and isn’t tax-deductible.
A large emergency savings fund. If you’ve got deep savings and minimal financial obligations, you might reasonably view income protection as unnecessary.
A low-risk occupation. Anyone in a desk-bound, low-stress role as an employee is statistically less likely to make a claim.
Get some help before you decide
With so many pros and cons, two things are clear. Income protection insurance is extremely worthwhile for some people and questionable for others, and working out which camp you fall into can get complicated. The good news is you don’t have to figure it out alone. A financial adviser can help you build a budget that shows exactly how your finances would hold up if your income were interrupted, and can talk you through policy types, conditions and premiums so you can make a confident call.
This is exactly the sort of thing we work through with clients as part of our personal insurance service, often alongside broader financial planning so it all fits together.
Talk to Virtuous Wealth
If you’re weighing up whether income protection is right for you, we’d love to help you think it through. Get in touch with our Newcastle team to book a no-obligation chat.
This article provides general information only and does not take into account your personal objectives, financial situation or needs. Before acting on any information, you should consider its appropriateness, having regard to your own circumstances, and seek personal financial advice from a licensed adviser.
