Income protection insurance
Income protection is designed to pay you up to 75% of your income if you can’t work due to illness, injury or involuntary unemployment. Policies vary from company to company, some can be relatively inexpensive but usually come with capped limits on the size of the payment (which may not cover 75% of high income earners salary) and how long the payments will continue, while others have no limit and can provide payments until you reach retirement age.
There are also policies available as part of your superannuation, but in many cases you may need to top these up through additional cover.
Types of income protection insurance
The two main types of income protection insurance are agreed value and indemnity value.
agreed value cover
Agreed value covers your income for an amount agreed upon when you take out the policy.
indemnity value cover
Indemnity value insurance is paid in your income at the time of the claim. Indemnity value is usually cheaper than agreed value cover.
Method of payment
The method of payment can also vary between policies. Level premiums more or less stay at a set level throughout the life of the policy - although they will increase gradually to keep up with inflation; whereas stepped premiums will increase more quickly over time. Level premiums are generally the cheaper option.
Although most superannuation funds offer income protection products, there aren't usually as many options as with non-super policies.
It's a good idea to speak to a financial adviser, to ensure you get the policy that is the best fit for your circumstances.
Websites such as Choosi provide quotes on income protection insurance from a range of providers.
Tax advantages of having income protection
Income protection insurance can be claimed as a tax deduction. This means that a portion of the premium that you pay will be taken off your taxable income thereby reducing your tax bill.
Total and Permanent Disability (TPD) Insurance
TPD insurance provides financial protection in the event that you are unable to work ever again due to injury or illness. TPD coverage can become quite complicated as injuries and illnesses can vary greatly in their severity. A person may not be able to continue in the job they had prior to their injury or illness, but they may be capable of performing another type of work.
There are two types of TPD insurance: 'own occupation' and 'any occupation'.
'Own occupation' insurance is paid if a doctor determines that you are unable to return to the occupation you were in prior to injury or illness.
Premiums for own occupation insurance are considerably higher than for any occupation cover.
'Any occupation' insurance is only paid if someone is not able to return to any occupation.
For example, if a carpenter loses an arm, they may not be able to continue working in their particular profession but can be retrained to work in another job. If the carpenter has own occupation cover, they will be paid out, however if they have any occupation insurance, they will not receive a pay out as they are still able to work.
Trauma insurance (also known as critical illness insurance) provides protection in the event that you suffer a serious illness or injury. It is designed to help with the payment of large medical bills, rehabilitation/therapy, modifications to the home, mortgage or rental payments, or to cover time off work for recovery.
The conditions covered by trauma insurance policies vary greatly between providers, so it's essential that you do some research before committing to a policy. Premiums also vary according to age, gender, and whether you smoke or not.
Our partner ANZ offers Income Protection and Critical Illness, along with Financial Planning find out more.