What is Income Protection insurance?

Income protection insurance provides you with a monthly income should you become unable to work due to injury or sickness.  The policy can cover you until you reach the age of 70. 

The purpose of income protection is to ensure you can continue paying essential expenses and maintain your existing lifestyle.  You are provided with a monthly income  (generally of up to 75% of your gross wage) for the period you are unable to work, subject to the waiting and benefit periods defined in each policy.

Buying Income Protection insurance

Income protection insurance can be purchased as a stand-alone product.  There are a number of options that must be considered when selecting the best policy for you. 

An important decision is the length of the waiting period - how long you must wait to make claim under the policy.  You are usually able to choose a wait period between 30 days and 2 years.  The shorter the waiting period, the higher the premium.  This allows you to tailor the policy to your needs.

How much cover?

Generally, it is desirable to have a replacement income of 75% of your normal taxable income.  This should assist you to meet living and medical expenses while you are unable to work.

You may be able to select the benefit period - the amount of time you can receive the replacement income to customise the level of protection to your needs.

Another important choice between 'Agreed Value' or 'Indemnity Value' policies.  Agreed value policies provide cover for the agreed value of your income at the time of your original application.  In contrast, an indemnity policy insures you for your income at the time of claim (i.e your income for the 12 months* prior to the date of claim).  (*This time period varies between insurance houses.)  

Cornerstone Insurance provides advice on the appropriate level of cover for you, taking into account your personal circumstances such as savings at hand, sick leave and long service leave you have available. 

Tax Considerations

Premiums for Income Protection Insurance are tax deductible and any proceeds are assessable as income in the event of a claim.

Income protection insurance may be held through your superannuation fund.  The tax-deductibility of income protection insurance means there is not a clear advantage in holding the policy within superannuation (unlike Life and TPD insurance).  However, there are a number of considerations that must be examined to determine whether the policy should be held via your superannuation fund, including whether:

  • there is a negative impact of a pre-retirement strategy;
  • the additional amount you will be contributing to your super fund to pay for the premiums, will take you over the superannuation contributions cap;
  • salary-sacrificing additional contributions will reduce the amount your employer is required to pay into your super fund under the Superannuation Guarantee; and
  • Income protection insurance is cheaper through your superannuation fund.

Homemaker Insurance

If you have a stay-at-home partner, you may also wish to insure against any incapacity that they may suffer.  Find out more about homemaker insurance by clicking here.