"She'll be right" attitude leaves Aussies underinsured

Life is full of surprises and they aren’t all guaranteed to be good.  That’s where income protection insurance can help. It can pay up to 75 per cent of your salary while you are unable to work, to help you meet essential repayments and keep your family budget afloat.

Who is income protection insurance for?

Income protection insurance is for anyone in the workforce, especially those who are self-employed, own a small business or are the sole income provider in their family.  Surprisingly, however, this type of insurance isn’t overwhelmingly popular in Australia. A 2013 Rice Warner report showed that just 37 per cent of Australia’s working population have income protection insurance.

What are the pros?

The major pro with having income protection insurance is peace of mind.  Anyone with regular mortgage repayments or a family to feed will know that it’s hard enough to make ends meet with a regular salary.  Imagine doing this without your pay check for a few months and you’ll work out just how important income protection insurance can be.

And the cons?

There is one major drawback to income protection insurance: it costs. RateCity research shows that insurance payments for 40 year old male on about $100,000 a year can range from as little as $80 per month to over $200 per month.

There a range of variables that will affect how much you pay which could include:

• your age;
• whether you work in an office or outdoors;
• how much you earn;
• your gender;
• whether you smoke; and
• the size of your mortgage repayments or other monthly repayments such as car loans and credit card debts.

How does it work?

Income protection insurance generally covers up to 75 per cent of your monthly income, up to a maximum period.  The maximum period is often two years but can be up to five years, or a certain age, which is normally around 65.

Like any insurance, there are varying definitions and terms and conditions so it’s important to take the time to read the fine print to make sure it covers you for what you need.  Yes, it’s boring but that five minutes of reading could save you a lot of problems if you ever need to use it. 

Most products include a waiting period, which is often between 30 and 90 days, and in some cases, you can negotiate a shorter waiting period for a higher cost.

The amount paid is also subject to negotiation.  Often you can pick between an agreed salary, normally the salary you are on when you take it out, or an assessed salary when you make a claim, which is generally the cheaper of the two options.

Stepped vs level premiums

Stepped and level premiums are terms that might be typical in the insurance world but not common knowledge to the rest of us.

A stepped premium starts out cheaper (when you are young and spritely) but increases over time as you get older.  It’s a good option if you don’t have much money to spare early on in life.  It can also be a good option if you decide to switch providers later on.

A level premium charges the same flat rate across your life.  Naturally the cost is relatively expensive when you are younger, but as you near retirement, it swings the other way and becomes a lot more affordable.

How much income insurance do I need?

Research conducted by Rice Warner suggests that parents aged 30 need approximately $4900 per month of income protection, while parents aged 50 need $5600 per month.

But everyone is different.  Look at your regular costs and work out what you need just to cover the bills.  If your monthly mortgage repayments are $4000 and you’re only insured for $3000 a month, then obviously you’ll need access to other money to cover this gap just to meet this one cost.  Income protection insurance will only cover up to 75 per cent of your salary so it’s important to factor this in.

Its tax deductible?

Yes! Although there are some caveats: you can only claim for income benefits and if it is tied to your super and the premiums are paid for out of your super contributions, then it isn’t tax deductible.  To find out the full list, visit the Australian Tax Office website.

Be aware this only applies to income protection insurance – products such as life insurance and total and permanent disability insurance are not tax deductible.

Related links:

• Compare superannuation
• Why to buy life insurance when you are young
• Navigating the insurance minefield