Income Protection Insurance
If your income disappeared tomorrow, and you could never work again, how would you cope financially?
Australian’s have a 1 in 31 chance of being out of work for more than 3 months due to accident of sickness. Income Protection Insurance provides the necessary protection agains the financial hardship that would follow
What does Income Protection Insurance provide?
The primary benefit of Income Protection is a monthly payment of up to 75% of your gross income.
Some optional features also available in most policies include:
- Inflation protection of the monthly benefit
- An additional Super contribution
- A lump sum payment for specific conditions regardless of time off work
- An accelerated payment in the event of an accident
Income Protection Decisions
When applying for an Income Protection policy you will need to decide the following:
The waiting period is the amount of time you must wait before receiving your first benefit payment. Waiting periods usually vary between 14 days and 2 years. Longer waiting periods reduce the cost of the insurance, because the chance of a claim is reduced.
The benefit period is the maximum amount of time the insurer will continue to pay a monthly benefit. Benefit periods usually range between 2 years and up to age 70. Longer benefit periods increase the cost of the insurance because the insurer is taking on more risk.
Agreed or Indemnity Benefit
As the name suggests, an Agreed Benefit is agreed upon at the time of application. The insurance company will exampine your current income and lock in the benefit. In the event of a claim you will not be requried to prove income.
An Indemnity Benefit, on the other hand, is finalised at time of claim. At claim time the insurance company will request evidence of income for the preivous 12 months. In the event your income has dropped, the insurer will only pay 75% of the recent income. Because the insurer is taking on less risk, an Indemnity Benfit is cheaper than an Agreed Benefit policy.
Taxation of Income Protection
As far as the ATO is concerned, Income Protection benefits are another form of income and are taxed accordingly. This is why Income Protection poicies are based on your gross income.
The good news is that Income Protection premiums are tax deductible. Therefore, if you have Income Protection Insurance be sure your accountant is made aware.
1. Institute of Actuaries of Australia 2000. Interim Report of the Disability Committee. IA Aust; Sydney.
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Direct Life Insurance Companies: Real Life Insurance Real Insurance is a part of the Hollard Insurance Group of companies. Real Life Insurance (Family Life Cover) pays your chosen benefit as a lump sum to you or your beneficiaries in the event of your death or terminal illness.