An unforeseen illness or injury can lead to considerable financial stress, particularly if it hinders your ability to work. Income Protection insurance acts as an essential safety net, supplying income replacement when you can’t work because of an illness or injury. Often accessible through superannuation funds, the premiums for this coverage are usually deducted from your super contributions, making it a convenient choice for many.
What is Income Protection insurance?
Income Protection insurance is intended to replace a portion of your income if you cannot work due to illness or injury. IP can be funded through your superannuation fund, with premiums deducted from your super fund, which minimizes the need for out-of-pocket expenses or paid by your out-of pocket expenses.
Default cover of Income protection is typically associated with your superannuation, so if you switch superannuation providers, you might lose this coverage. In contrast, income protection insurance bought outside of superannuation or within super using a Retail life Insurance policy can be paid by you directly or by completing a new rollover form for your new super fund.
How Does Income Protection Insurance Work?
Income protection insurance offers income replacement for a specified duration if you are unable to work due to illness or injury. It generally covers up to 70% of your pre-disability salary, helping you maintain some income during recovery, although it may not meet all your expenses. There is typically a waiting period of 30 days to 2 years before benefits commence.
The benefit period for income protection insurance usually lasts two years or until you are able to return to work. Some policies may provide extended coverage up to age 65, though these often come with higher premiums.
What to look for in your income protection
When assessing an income protection policy, take into account these features to ensure it aligns with your needs:
- Coverage Amount: Income protection usually covers about 70% of your income. While it may not fully replace your earnings, it can assist in covering essential living expenses.
- Waiting Period: This is the duration you must wait before payments begin. Common waiting periods range from 30 to 90 days, though some policies may offer different options. Shorter waiting periods often result in higher premiums.
- Benefit Period: This defines how long you will receive payments while unable to work. Typical benefit periods are two years, but some policies might provide extended coverage, such as until age 65, based on specific terms and conditions.
- Portability: Default cover of IP in the superannuation may not move with you if you change funds. Conversely, a standalone income protection policy bought through a Retail Life Insurance policy is portable and allows flexibility to be funded through another super fund.
Income Protection vs. Workers’ Compensation
Income Protection insurance differs from workers’ compensation. Workers’ compensation is mandatory for employers to offer and covers injuries related to work. It is applicable only to incidents that happen while you are working or due to your job responsibilities.
Conversely, income protection insurance protects you against injuries or illnesses that happen outside of work. For instance, if you fall ill or get injured while on vacation or during activities unrelated to work, income protection insurance would provide income support, unlike workers’ compensation.
Do You Already Have Income Protection Insurance?
Many individuals may unknowingly possess income protection insurance, as it is frequently provided as a standard benefit within superannuation funds. To determine if you have this coverage, you can:
- Check with Your Superannuation Fund: Reach out to your super fund or access your online account to verify if income protection insurance is part of your benefits. Be sure to check details like the waiting period, benefit period, and coverage amount.
- Review Your Superannuation Statements: These statements typically outline any insurance coverage, including income protection insurance, and provide information on premiums and coverage terms.
** Please note that, the default Income Protection cover in your super has generally higher premiums than the retail cover. Additionally, it can be cancelled anytime due to unforeseen circumstances like changing a new job, switching to new super fund or when your grow older etc. **
Do You Need Income Protection Insurance?
Your need for income protection insurance depends on your personal financial situation. Consider these factors:
- Financial Buffer: If you have significant savings or an additional income source, income protection insurance might be unnecessary. However, if your income is essential for covering daily expenses, this insurance can offer valuable reassurance.
- Income Protection Insurance Comparison: Evaluate income protection insurance against income protection insurance, which provides greater flexibility, portability, and often longer benefit periods. Income protection policies can be customized to meet your specific requirements and frequently offer more extensive coverage options beyond superannuation.
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Author Profile: Jeffrey Liu, JP, is the founder and principal adviser of Hippo Insurance (aka: Hippo Wealth), with a deep expertise in wealth protection. His extensive experience includes roles in the wealth management divisions of Westpac, ANZ, and a local multi-family office. As the host of “Riches Talk,” a podcast dedicated to cultivating personal and business growth, Jeffrey has established himself as a thought leader in developing life riches. His insights have been featured on SBS, The Australian, and Channel 7. Notably, he was a semi-finalist on Australia’s Got Talent in 2010. Learn more at http://www.hippoinsurance.com.au
