Income Protection (IP) Insurance

Download Flyer

Income Protection Insurance protects you by paying an ongoing income if you are unable to work due to illness or injury .

Benefits

Income protection cover pays an ongoing monthly benefit to protect:

  • your lifestyle by replacing your lost salary so you can continue to meet your living expenses and debt repayments, and
  • your wealth by reducing or removing the need to sell assets to generate cash.

Without insurance, you may need to run down your savings, sell assets, and/or rely on family or Centrelink for assistance. You may find it difficult to maintain your standard of living or pay for the care and medical assistance you need. This can place extra stress on your recovery.

How it works

You can usually apply for cover of up to 75% of your earnings. For business owners this is income after business expenses but before tax. You may also be able to have an additional amount paid as contributions into your superannuation account and other ancillary benefits to help with your recovery.
The payments are taxable income but tax may not be deducted from each payment. So you should seek tax advice and make sure you set aside money to pay your tax liabilities. If paid through superannuation, tax is usually deducted from each payment to help you manage this obligation.
The amount you receive may also be reduced if you receive payments from sick leave, social security, workers compensation or other legislative sources.

Agreed Value or Indemnity

You can obtain your income protection cover under an ‘Agreed Value’ or ‘Indemnity’ policy.
Under an Agreed Value policy, you will receive the agreed monthly benefit at the time of a successful claim, regardless of the amount you are earning at that time. With an Agreed Value policy you are required to provide proof of income at the time you apply for cover. This may suit you if your income fluctuates over time, you are able to substantiate your income and want peace of mind at time of claim.
With an Indemnity’ policy, the amount you receive at the time of a successful claim will be assessed on the basis of your earnings in the 12 months prior to the disability. You will need to provide proof of income at time of claim and if your income has reduced you may receive less than expected. This may suit you if you have a stable income and are likely to be able to easily substantiate your income at the time of claim, your occupation does not allow an Agreed value policy, or you have only recently established your business and do not have two years of financial evidence available. The premium for an Indemnity policy is less expensive than an Agreed Value.

Waiting and Benefit Periods

In the event of a successful claim, benefit payments do not start immediately; a waiting period will apply during which no benefit is payable. The waiting period can be as short as 14 days or as long as two years. When choosing a waiting period, it’s important to take into account any sick leave and related benefits provided by your employer. The shorter the waiting period, the higher the premium.
The maximum period of time that payments continue is called the benefit period. A range of benefit periods are available – some as short as one year, with the longest continuing through to your 65th or 70th birthday. In general the longer the benefit period, the higher the premium
Injury Insurance

Policy Ownership

Income Protection Insurance can be owned either in your own name or within your superannuation fund.

Self-ownership
Owning the policy in your own name may allow you to better tailor the cover to suit your individual requirements (e.g. to obtain more comprehensive benefits and ancillary benefits). With self-owned cover, you pay the premium from your cashflow. The premiums are tax deductible to you and benefits that you receive in the event of a successful claim are treated as taxable income and taxed at your marginal tax rate.

Superannuation ownership
You may also be able to purchase your cover in your superannuation fund. This allows the premium to be paid by making contributions to super or simply be deducted from your superannuation account balance so it does not affect your cashflow. The premium is a deductible expense to your superannuation fund and can reduce the t ax payable on contributions and investment income. The benefit to you will depend on your superannuation fund.
If additional contributions are made into superannuation to cover premiums it is important to ensure you do not exceed the limits on how much can be contributed.
The proceeds in the event of a successful claim are paid from your superannuation fund as a temporary illness benefit and will be assessable income that is taxed at your marginal tax rate. You will first need to meet the release definition for superannuation which may be harder to meet than a self-owned policy.
For business owners it may be appropriate for the business to own the cover. This ensures any claim proceeds are paid directly to the business so it can distribute the funds accordingly.

Optional benefits

Income Protection policies may offer important options including:
  • an Increasing Claims option that ensures benefit payments are indexed in line with inflation
  • a Superannuation Cover option that allows you to have contributions made to your superannuation fund (above
  • the level of salary cover)
  • other ancillary and rehabilitation benefits.

Consequences

  • Funding the premiums from your superannuation balance will reduce the growth of your retirement savings unless you make additional contributions to offset the premiums. These contributions will count towards your contribution caps.
  • Benefits are paid monthly in arrears so your first payment would be received one month after the end of your waiting period.
  • Benefit payment is usually excluded if you suffer sickness or injury as a result of war (or an act of war), a self- inflicted act, or uncomplicated pregnancy.
  • You should always carefully read the Product Disclosure Statement (PDS) and policy document for your selected insurance policy and keep these documents in a safe place.