Income Protection Policy Options in Australia

Whether you’re making money for yourself or to help support your family, chances are you might need income protection insurance. Income protection policies support your ability to earn an income by proving a monthly benefit should you be unable to work, temporarily or permanently, for a specified period due to an illness or injury.

Published February 16, 2022

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Before you choose an income protection policy, it’s important that you understand what exactly you’re signing up for to determine whether the policy is right for you.

There are different types of income protection policies to choose from. To find the right policy that meets your requirements, you might want to shop around and compare various options from some of Australia’s major brands. We’ll help you set up the right policy for your unique requirements.

What is an income protection policy?

An income protection policy pays you a monthly benefit, generally up to 70% of your pre-claim income, should you become ill or injured and cannot work for longer than your waiting priod. The monthly benefit provides you with the ability to continue paying your monthly bills, so you can focus on recovery and return to work.

The right income protection policy should match your:

To thoroughly understand all of the options, benefits and features available to you, it’s best to consult the relevant Product Disclosure Statement (PDS). However, to help you in your search we explain some of the most important factors you need to consider before deciding which policy is right for you.

Choosing between the different types of income protection policies

When selecting an income protection policy, be mindful of your budget and the amount of cover you take out. There are a number of options to choose from and some additional options you can add to enhance and tailor your policy to meet your specific requirements.

Generally, insurers gave you the choice between an Agreed value and Indemnity value income protection policy. However, the recent changes implemented by APRA mean you’ll now only be able to apply for an Indemnity Value income protection policy.

Indemnity Value income protection

Indemnity value policies are usually cheaper than Agreed value policies, but it does not guarantee your monthly benefit. Your monthly benefit is generally determined during claim time, which is when the insurer will request the financials showing your proof of income. With an Indemnity policy, your monthly benefit will be the lesser of 70% of your pre-disablement income or your insured monthly benefit. Therefore, if your income reduces after you took out the policy you may receive a lesser monthly benefit.

Which type of income protection policy is best suited to you?

If you are eligible, an Agreed value (Guaranteed value) policy is generally better suited to persons with a fluctuating income, like business owners, consultants and freelancers.

An Indemnity value policy is usually better suited to people that have a stable income (or do not qualify for an agreed value policy) and can confidently provide proof of income.

Income protection policy options

There are a variety of options you can add on to your policy to better tailor your income protection for your specific requirements. Please note that this is a general list and does not include every option offered by each life insurance company.

1. Increasing claims

Allows your monthly benefit to increase while you are on a claim. You can choose to increase your monthly benefit by either the annual Consumer Price Index (CPI) or by a pre-determined percentage as outlined in your PDS. This option is generally more suited to policies with a benefit period longer than 2 years.

2. Plus vs Standard policies

Insurers will typically offer a Standard and Plus income protection policy option. The Plus option generally offers more benefits at a slightly higher premium, for example:

The above options can be chosen separately or might be part of the Plus policy option. It’s best to review the relevant PDS for more details before considering which option to choose.

3. Bed confinement

The bed confinement option provides you with an additional payment if, due to a sickness or accident, you are confined to a bed or need to be near a bed for at least 3 consecutive days during your waiting period.

You will generally receive 1/30th of your monthly benefit for each day of bed confinement, until the end of your waiting period.

4. Total disablement booster payment

You can increase your monthly benefit by 33% with the total disablement booster payment option in the event you suffer a total and permanent disability.

To claim this option you will generally need to be totally and permanently disabled and unable to perform at least two of the activities of daily living, including:

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Buy with confidence today for peace of mind tomorrow.

Income protection policy ownership options

Another very important decision you should consider before comparing policies, is how you want to structure your income protection insurance, meaning who will pay for your policy and who owns it.

Usually, income protection insurance can be owned by either yourself, the insured individual, or by your Superfund. In some cases a policy can also be owned by a company, usually when a business takes out keyman insurance.

Self-owned vs Owned by Super

Who you choose to own your policy will impact who has control over it, meaning the policy owner can make changes to the policy, but the owner is also responsible for paying the premiums.

  1. Self-owned income protection: The life insured owns the policy and pays the premiums. When the income protection policy is owned by you, you can claim the tax deductions.
  2. Superannuation owned: Taking out income protection through your super fund allows for your premiums to be paid by your fund, which could help with short-term cash flow problems. However, it might reduce your retirement savings and the fund will receive the tax deductions, not the insured individual. Gaining access to the monthly benefit can be more complex as you need to meet both the policy eligibility criteria as well as an SIS condition of release.

Select insurers will also offer you the opportunity to split your income protection between self-ownership and fund ownership, this is called Split Income Protection. When structuring your policy in this way, you’ll benefit from both self-owned and super owned options.

Can you have two income protection policies?

Yes, generally you can have two income protection policies. However, they should differ in waiting period and benefit period. Because you can usually only be insured for up to 70% of your income, claiming on multiple income protection policies should not leave you better off financially than if you were able to keep working.

For example, you might have one policy that has a 30 day waiting period, but only a 2-year benefit period, and another policy with a two-year waiting period that pays out a monthly benefit until your age 65.

You need to fully disclose all your existing policies to every subsequent insurer so that the underwriter has all the information needed when assessing your application and whether it’s financially justifiable for you to have multiple income protection policies.

The cost of income protection premiums

The cost of your income protection premiums will be influenced by a number of factors, including your occupation, age, the amount of cover you want, your overall health (including whether or not you smoke), the insurer’s definition of a disability, and your waiting and benefit period.

Choice of income protection premium type

The cost of your premiums will also be affected by your choice of premium structure: Stepped, level or hybrid premiums.

1. Stepped premiums

Cheaper in the short term as they start off more affordable but increase every year as you age. When you become older, you are generally more likely to claim.

2. Level premiums

More affordable in the long term as premiums are based on your entry age, but they start off more expensive.

3. Hybrid premiums

Also known as Optimum premium, is a mix between stepped and level premiums and are only available from select insurers. Your policy converts from stepped premiums to level type premium when your stepped premiums reach a pre-determined price, which is higher the level premiums would have been.

Choice of income protection policy payment method

There are a few ways you can choose to pay for your income protection policy. You can pay via Direct Debit or by using your Credit card; there is no extra fee required when selecting payment with credit card.

You also have the choice of paying either fortnightly, monthly or annually. However, premiums are generally 5-8% lower when you pay your premiums yearly.

How to compare income protection policies

Finding the right policy for you depends on your individual requirements and budget. It’s important that you take the time to compare similar income protection products from major brands before making a decision. To get started with your search, you might want to read our step-by-step guide to comparing income protection quotes.

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