Insuring your car, home or other possessions makes sense. So why do so few of us insure ourselves? If illness or injury stopped you from working for an extended period, could you keep paying your bills? Income protection insurance gives you peace of mind that if the unexpected occurs, you and your family will be provided for.

What is income protection insurance?

Income protection insurance is an important way of assisting you and your dependants to be financially supported in the event of serious illness or injury resulting in your capacity to work being temporarily impacted. If your ability to earn an income is affected, an income protection policy may enable you to maintain your current lifestyle and continue supporting those who depend on you.

Income protection, also known as salary continuance insurance, pays a monthly benefit of up to 70% of your pre-tax salary if you are disabled due to an illness or injury for longer than the nominated waiting period. Premiums are tax deductible.

Why do I need it?

While we recognise the emotional impact of events such as serious injury or illness, the financial consequences can be equally devastating. If the unexpected did occur, having income protection insurance can go a long way to helping you and your family meet your basic living expenses such as your mortgage, groceries, petrol or school fees. It provides peace of mind and can be very 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, you’ll need to make payments on even if you’re unable to work

To work out how much income protection you need, prepare a budget. This will help you see your monthly expenses and the income you’ll need to replace. You may want to factor in making payments to your super as well.

Waiting period

Benefit payments begin after a predetermined waiting period that you nominate when you take out the cover e.g. 14 days. Generally, a longer waiting period means a lower premium however it also means you’ll have to wait longer to receive your first benefit payment from the time you initially become unable to work. A helpful factor to consider when selecting a waiting period can be the amount of sick and annual leave you have.

Benefit period

The benefit period is how long the monthly benefit payments will continue if you remain unable to work due to illness or injury. This is the predetermined maximum period of time the policy will continue to pay the benefit and can be a set timeframe, such as two years, or an age based timeframe (e.g. up to age 65). The longer the benefit period, the more expensive the policy, but it also means greater protection if you’re unable to work for a longer time.

Upcoming changes to contract terms 1 October 2022

Currently, an insurer cannot change your policy terms and conditions. This means that if you were to change your occupation from an account executive to a chef, for example, your income protection premiums will not be affected. After 1 October 2022, the insurer has the ability to reprice your premiums and adjust the terms of your policy if your occupation changes.

For example:

Sarah is an account executive who works full time in an office. Her occupation rating is AAA and her premium reflects this. Five years later, Sarah changes career and her occupation is now a B rating however, as Sarah held a policy prior to 1 October 2022, her policy is not affected and her premiums continue to reflect a AAA occupation rating.

John takes out an income protection policy after 1 October 2022. He also changes career from a AAA rating occupation to a B rating. His policy is affected and his premiums increase to reflect his change.

This is important to note if you are considering changing or cancelling your cover.

Need advice?

Selecting the right income protection policy can be challenging with so many products on the market with complex terms and conditions. Contact our financial planning team for a complimentary initial conversation about the most suitable options for your personal situation. The Government’s moneysmart website also provides valuable information.

The information on this web page is not advice and is intended to provide general information only. It does not take into account your individual needs, objectives or personal circumstances