By 
Your ability to earn an income is your biggest asset by far – and without an income, life can become a lot more tricky - which is why income protection is so important.
If you're unable to work due to partial or total disability, income protection insurance pays:
- generally 70% of your pre-tax income in the first two years plus 100% superannuation contribution, and
- generally 60% plus 100% superannuation contribution longer term.
Income protection insurance is designed to replace your income based on your annual earnings in the 12 months prior to your illness or injury. Where possible, it should be based on definitions which consider the main income producing duties of your role at the time of disability.
Each income protection policy has its own definition of partial or total disability that must be met before a claim is made. Check the insurer's website or the product disclosure statement (PDS) for the definition and any exclusions.
When you’re protecting your biggest asset, there are 4 things you need to understand:
- How much you’re covered for – benefit amount.
- How long you need to wait for your claim to be paid – the waiting period
- How long your claim will be paid for – the benefit period
- How much you will pay – the premium
1. Benefit amount
When you apply for income protection, you can generally choose to insure up to 70% of your before-tax income (with super contributions in addition).
2. Waiting period
The waiting period is the number of days before you become eligible to claim, starting from the medically determined date of disability. The most commonly chosen waiting period options are 30 days, 60 days and 90 days. Importantly though, income protection benefits are generally paid 30 days in arrears so add that to your considerations.
3. Benefit period
The benefit period is the maximum amount of time you can receive income protection payments for any claim. It can be based on time (e.g. 2 years, 5 years) or age (e.g. to age 65) and your choice can make a difference to the total amount you receive, and most importantly how long you may need it for.
Say you’re aged 35 and you become permanently totally disabled, meaning you’ll never be able to return to work. If you had a 2-year benefit period, your benefit payments would stop when you’re aged 37. But if your benefit period was to age 65, you would continue to receive benefit payments for an additional 28 years.
4. The premium
Premiums will reflect the benefit amount, along with the benefit period and waiting period.
The benefit amount is usually fairly straight forward, being a % of your earnings.
When selecting your waiting period, you should think about how soon you’re likely to need financial support if your income stops after using available sick leave, annual leave or perhaps accessible savings. Naturally, a policy with a 30-day waiting period is more expensive than the same policy with a 90-day waiting period, because you’re eligible to claim sooner.
A longer benefit period will have a bearing on the premium paid, however it will also provide peace of mind knowing you will be financially secure in the long run if you are unable to work again through illness or injury.
Income protection premiums are generally tax-deductible, which can make it significantly more cost-effective to get the cover you need.
Where to get help
The cover needs to be appropriate for your circumstances. The choices may seem overwhelming, however the Cutcher & Neale Risk Insurance team will consider your individual situation then choose from multiple providers to ensure you receive the best insurance solution.
