Income Protection Insurance: what you need to know

Income protection insurance exists to safeguard your most valuable asset: your ability to earn.

Income protection offers financial security in the event of illness or injury that prevents you from working. This guide delves into the nuances of income protection insurance, its importance, benefits, and how to choose the right policy that suits your needs.

What is Income Protection Insurance?

Income protection insurance is a financial safety net that replaces a portion of your income if you're unable to work due to illness or injury. It typically provides regular monthly payments over a set period, helping you stay on top of essential expenses like bills, groceries, and mortgage repayments while you focus on recovery. More than just covering costs, this insurance ensures you can continue caring for yourself and your loved ones - keeping your household running and maintaining a sense of stability during challenging times.

Why is Income Protection Insurance Important?

Unforeseen illness or injury can suddenly interrupt your ability to earn an income - often without warning. For many people, this disruption can have immediate and far-reaching financial consequences.

Without income protection insurance, losing your income could mean struggling to keep up with mortgage repayments, dipping into savings, or relying on government assistance. Everyday expenses like groceries, utility bills, childcare, and debt repayments can quickly become overwhelming, adding stress during an already difficult time.

On the other hand, having income protection insurance offers a much more secure scenario. Regular monthly payments can help you manage financial obligations while you recover. Your household can keep running, your lifestyle remains stable, and your family can be protected from financial hardship.

Ultimately, it’s peace of mind that ensures you can continue to support yourself and those who depend on you, even when life takes an unexpected turn.

How does Income Protection Work?

If you are no longer able to work due to illness or injury, you can lodge a claim after your policy’s waiting period. If approved, your insurer will make monthly payments for the benefit period -  which may last for two years, five years, or until you turn 60 or 65 (this will depend on the policy you picked).

Types of Income Protection Cover

Income protection isn’t one-size-fits-all. Policies vary in scope and duration:

• Short-Term Cover: Benefits paid for a limited time (e.g. 2 or 5 years).
• Long-Term Cover: Payments until a set age, typically 60 or 65.

Each type suits different needs - and different risk appetites.

What Affects the Cost of Income Protection Insurance? 

Several variables may influence your premium )depending on the policies you are comparing):

• Age and Health: Older individuals or those with health conditions may pay more.
• Occupation: High-risk roles can increase premiums.
• Policy Terms: Shorter waiting periods and longer benefit periods typically raise premiums.
• Lifestyle: Smoking or high-risk hobbies may also increase costs.

Key Benefits of Income Protection Insurance through super 

• Affordable Premiums: When purchased through your super fund, premiums may be lower because super funds negotiate group rates - making it a cost-effective option.
• No Impact on Your Take-Home Pay: If arranged through your superannuation (such as with legalsuper), premiums are deducted from your super balance - so there's no need to budget for it from your take-home pay.
• Peace of Mind: Provides confidence and financial security, knowing your obligations can be protected even if life takes an unexpected turn.

How Income Protection Differs from Other Insurance

Income protection complements other types of insurance:

• Life Insurance: Pays a lump sum upon death or usually terminal illness
• TPD Insurance: Covers permanent inability to work

Income protection fills a different but critical gap - helping cover your day-to-day expenses if you can’t earn due to illness or Injury.

Choosing the Right Policy: Key Factors to Consider

When deciding how much income protection insurance you need, consider:

• Your Current Salary: Helps determine the amount of income you'll need to replace if you're unable to work.
• Savings and Investments: Existing financial assets can offer temporary support but may not be sufficient long-term.
• Outstanding Debts:  Include personal loans, credit cards, and other financial obligations that require regular repayments.
• Mortgage or Rent Payments: Ensure your cover is enough to meet housing costs, which are often your largest expenses.
• Dependents: If you have children, a partner, or others relying on your income, you may want to choose longer benefit periods and shorter waiting periods to be able to support them quicker and for a longer period.

Income protection is about more than just covering costs - it’s about securing your future, maintaining your lifestyle, and supporting the people who depend on you. Whether you're exploring your options for the first time or reassessing your current cover, understanding how income protection works can make a real difference when life doesn’t go to plan.

If you're unsure about what cover you have or whether it's right for your needs, our experienced Client Service Managers are here to help. Book a free 1:1 consultation to explore your options with confidence.