Investor Education > Life Insurance > Income Protection Insurance

WHAT IS INCOME PROTECTION INSURANCE?

Of the working population, 1 in 6 men and 1 in 4 women are expected to suffer a disability from the age of 35 to 65 that causes a loss of 6 months or more work.
Institute of Actuaries. Table IAD 89-83. White collar males and females.

Income protection insurance provides a monthly benefit where the insured becomes unable to work due to illness or injury. This monthly benefit is designed to replace the income lost, allowing the insured to continue to make debt repayments and pay for everyday living expenses. Terms and conditions will apply to the income protection cover, and will be fully detailed in the product disclosure statement.

Why buy income protection?

Income protection will pay for the expenses that continue even when unable to work, including repayments on home loans and personal loans, house bills, children’s school expenses and so on. In doing so it provides financial security, enabling the insured and their family to maintain their lifestyle in the event that the insured is not able to work.

How much cover is required?

The maximum monthly sum that can be insured under an income protection insurance policy is 75% of gross wages. Factors to consider when deciding on the income benefit to insure include debt repayments that will need to be made even if not working, as well as everyday living expenses that will need to be paid even if not working.

If unsure about the right amount of cover, advice from a professional is recommended. It is also recommended that the monthly sum insured be reviewed regularly, especially with changing circumstances that may effect whether the income protection insured amount continues to be sufficient.

Features and options

Most income protection policies will offer a range of waiting periods (that is, the duration before the commencement of income benefits) including 14 days, 30 days and 2 years. A range of benefit periods (that is, the period that the income benefit will be paid for) is also typical, including for 2 years, 5 years or until age 65. The waiting period and benefit period will affect the policy premium.

Taxation of income protection

A tax deduction can generally be claimed on income protection premiums paid. Benefit payments are treated as income and are subject to tax.