Income Protection Insurance

How income protection works

Income protection pays a monthly benefit if you are unable to work because of illness or injury. The benefit is usually a percentage of your pre-disability income, commonly up to 70 percent, although the percentage and how income is assessed vary between insurers and policies.

Payments generally continue while you remain unable to work, until you return to work or reach the end of your benefit period, whichever comes first. Many policies also include partial benefits if you are able to return to work in a reduced capacity.

Income protection is different from lump sum cover such as TPD (Total and Permanent Disablement) cover and trauma cover. It is designed to replace income over time rather than pay a single amount.

Waiting periods

The waiting period is the length of time you are unable to work before benefits start to accrue. Common options include 30, 60 and 90 days, and in some cases longer. Payments are then usually made monthly in arrears.

A longer waiting period generally means a lower premium. When choosing a waiting period, many people consider how long they could manage on sick leave, savings or other income before they would rely on the policy.

Benefit periods

The benefit period is the maximum length of time the policy will pay for any one claim. Common options include two years, five years, or to a set age such as 65. Longer benefit periods usually cost more, but they provide protection for longer if a condition prevents you working for many years.

For people in their 40s and 50s, the benefit period is worth checking carefully, as the number of working years left, the size of any remaining debts and super balances all play a part in what may suit.

Agreed vs indemnity cover

Older income protection policies were sometimes written on an agreed value basis, where the monthly benefit was set at the time of application. Most policies available today are indemnity based, where the benefit is calculated on your income at, or shortly before, the time of claim.

In general terms, this means it is important that your insured amount reflects your current income, and that you understand how your insurer assesses income if you are self employed or your earnings vary from year to year. If you hold an older agreed value policy, it may have features that are no longer offered, so it is worth understanding these before making any change.

Income protection inside vs outside super

Inside super

• Premiums are paid from your super balance
• Benefit periods are often shorter, and features may be more limited
• Benefits are paid to you through the super trustee

Outside super

• Premiums are paid from your own cash flow
• Premiums for income protection held outside super are generally tax deductible
• A wider range of features and options is usually available

Tax treatment depends on your individual circumstances, so it can be helpful to check with your accountant or tax professional.

Why premiums rise with age

Income protection premiums are based on the likelihood of a claim. As we get older, the likelihood of illness and injury generally increases, so stepped premiums tend to rise each year, often more noticeably from the mid 40s. Premiums can also change because of indexation of your benefit, changes to policy fees, or an insurer repricing its products.

Many people are surprised by how much their income protection premium has increased over time. Understanding the reasons behind the increase is often the first step in deciding whether your current policy still suits you. Our Resources page includes an article on why premiums rise after 45.

How a review can help

A review of your income protection may help you understand:

• Whether your insured amount still reflects your current income
• Whether your waiting period and benefit period still suit your situation
• Whether you hold cover both inside and outside super
• What options may be available across a range of insurers
• Which features of an older policy may be worth keeping

It is generally wise not to cancel an existing policy until any new cover has been fully accepted. Our Insurance Review page explains how we work through each step, and our claims support page explains how Michael helps if you make a claim.

How Harbour Life Insurance can help

Michael Shagrin is a life insurance specialist with over 30 years of experience. He explains how your income protection works, compares your current cover across a range of insurers and provides options for you to consider. Our service is free to you because Harbour Life is paid by the insurers.