Income protection insurance: Is it worth the premiums?

Income protection insurance is a financial tool that’s essential for some people, ‘nice to have’ for others, and possibly quite unnecessary for a third group. In other words, there’s no one-size-fits-all answer to whether the premium cost justifies the risk. It depends on your circumstances, so it’s worth examining what the cover provides and the factors that should influence your decision-making.

What is income protection insurance?

Income protection insurance is meant to replace your income, based on your annual earnings in the year before a serious illness or injury that prevents you from working. It can pay up to 90% of your pre-tax income for the first six months of your disability and up to 70% for a further period.

Note that you will only be covered if you lose your income for medical reasons, not for redundancy or other employment termination, or for taking unpaid leave. Policy terms will vary, so it’s important to read the Product Disclosure Statement.

Cost of income protection premiums

Premiums will vary based on your age, gender, occupation, health, lifestyle, benefit payment period, how long you choose to wait before payments start, and whether you decide on variable or age-stepped premiums. This means the cost can range from as little as $35 per month to over $100 per month. You would need to compare quotes tailored to your situation from several insurers.

7 reasons for choosing income protection insurance

1. Safety net: Having a security buffer when your income stops, so that you can still pay bills and make mortgage repayments, is especially important if you don’t have a large amount in emergency savings.
2. Self-employed: Small business owners and other self-employed people may not be able to rely on sick or annual leave if they are unable to work.
3. Primary breadwinner with dependants: If you’re the main or only income earner with a family that relies on your earnings, losing your income for an extended period could be devastating.
4. Risky occupation: Although you’ll pay more in premiums, being covered for an occupation with an above-average risk of illness or injury is reassuring.
5. Peace of mind: Financial stress can hinder your recovery from illness or injury. Protecting your income will reduce the additional anxiety.
6. Personalised policies: You don’t have to pay for other policyholders’ potential problems. Premium costs will depend on your own situation and choices.
7. Tax deductible: Income protection premium costs, for policies held outside your superannuation account, are effectively reduced by the fact that they can usually be claimed as a tax deduction. Find more information on this at the ATO website.

6 considerations for deciding against income protection insurance

1. Age and health status: Young, healthy individuals with no dependants may feel less likely to need this type of insurance.
2. Waiting periods: Some policies have long, fixed waiting periods before you can claim, by which time you may be back at work.
3. Exclusions and complexity: Conditions, definitions and exclusions regarding certain occupations and types of disability may make it difficult for you to claim.
4. Insurance through superannuation: Total and Permanent Disability (TPD) cover may be automatically provided via your superannuation, and you may also have the option to have Salary Continuance Insurance premiums deducted from super contributions made by your employer. However, this type of insurance is less flexible and is not tax-deductible.
5. Large emergency savings fund: If you have deep savings and/or minimal financial obligations, you may regard income protection insurance as unnecessary.
6. Low-risk occupation: Employees in desk-bound, low-stress occupations are less likely to file a claim.

Get some help before you decide

With so many pros and cons, not only is it clear that income protection insurance is extremely worthwhile for some but questionable for others, it’s also plain that deciding whether it’s right for you can be complicated. However, your financial adviser can help you create a budget to clarify your financial situation should your income be interrupted, and can also advise on policy types, conditions and premiums.

For a straightforward overview of how income protection insurance works, the government’s Moneysmart website is a useful starting point.