Income Protection: (also known as salary continuance insurance)

Deciding if you need income protection insurance or not?


Who needs it?

Income protection insurance can be important if you:

  • Are self-employed or a small business owner, as you may not have sick or annual leave
  • Have family members or dependents that rely on the income you earn
  • Have debt, such as a mortgage, that you’ll need to make payments on even if you’re unable to work
  • If you have an income

The 3 bullet points above pretty much cover most people.

You need to also consider:

  • If you have total or permanent disability, trauma, or critical illness then insurance can help replace lost income
  • If you have private health insurance that could help pay for any medical expenses
  • If you have help or support from family and friends – Many people don’t want to have to reply on this though, right? No one wants to feel like they’re placing a burden on family by getting them to chase up funds.

You should check if you already have income protection insurance through super. Most super funds offer default income protection insurance that’s basic and should be taken into account to see if its suitable or should be added to or replaced.


When do I get paid?

Policies have an agreed waiting period after illness or injury before benefits become payable. Waiting periods vary and start from as short as 14 days. The most common waiting periods on offer are 30, 60 or 90 days. Some policy give you an option of a 2 year waiting period which can be good if you want to layer policy.

Usually, the longer the waiting period, the cheaper the premium you pay. So a policy with a 90-day waiting period will usually be cheaper than one with a 30-day waiting period. Always best to think about how long you could afford to be off work with no pay for before you select a longer wait because it is cheaper. Most insurance companies pay at the end of the first month you qualify, so a 90 day wait would really mean a 120 day wait until you get anything paid!

If you have some accumulated savings or sick leave you can use to support yourself, choosing a longer waiting period can save you some serious dollars.


How long does the benefit last?

Benefits will typically continue to be paid until you return to work or until the benefit period of the policy ends – whichever comes first.

Benefit periods of policies can be for agreed fixed terms (commonly for two or five years) or to an agreed milestone (such as your 65th birthday).

A policy with a longer benefit period will typically be more expensive than a policy with a shorter benefit period.


How does it work?

Let’s use an example:

Ben is a 39-year- old Financial Planner who earns a salary of $100,000 per annum. He has an income protection policy that insures 75% of his salary with a 90-day waiting period and a benefit period to age 65.

Ben is seriously injured in a mountain bike accident. His injuries mean he is unable to work for at least the next six months. He will not receive any benefit from his income protection policy for the first 90 days (his waiting period), but from that point he will be eligible for a monthly benefit of $6,250 ($100,000 x 75% / 12). Remember (most likely) at the end of the first month Ben qualifies, he will get paid.

If Ben’s injuries prevent him from ever re-entering the workforce, his monthly benefit will continue to be paid to age 65 (his benefit period).


Should you be using super to hold your cover?

When income protection cover is offered via super, the policy needs to comply with the relatively strict confines of super law. The benefits paid under such a policy must align with the ‘temporary incapacity’ condition of release.

Unfortunately this means the benefit that can be offered is a bare-bones type of benefit. The policy will typically be an indemnity-type policy, won’t be able to pay a benefit if you cease work for any reason other than illness or injury, and won’t provide an injury-specific benefit.

The upside, however, is that you can use your super benefits to pay the premiums (but over time this will impact what you save for your retirement and you should discuss other financial planning strategies for this option if you are considering it).

Some life insurance companies will offer you a bare-bones policy inside super and a more comprehensive top-up benefit outside super. This type of structure, typically known as splitting or linking of benefits, can give the best of super and non-super solutions. This also will allow you to split the cost to give you a more comprehensive solution within a budget.

Remember not all policies are created equal. A slight difference in definition can make a very large difference in benefit. Compare the benefits provided, not just the premiums charged.


Tax issues

Just like the income you are protecting, the benefits you receive from an income protection policy will be assessable and subject to tax at marginal tax rates – because you’re still earning a salary, it’s just coming from the insurance provider, not an employer.

If held in super, premiums are paid for using your super and are generally tax deductible for the trustees of the super fund. If outside, you can claim the cost of premiums you pay for insurance against the loss of your income.

Talk to your Financial planner to see if you could use this strategy.


If you don’t have a Financial Planner give us a call to make a time to discuss your personal situation.


Disclaimer: This is factual information and should not be taken as personal advice as your personal situation has not been considered. There are other conditions and considerations which you will need to meet to qualify and have the funds released out of the Superannuation environment. Before acting on any advice, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. We recommend you discuss these strategies with a Financial Planner to see if it meets your Personal circumstances.

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