Work cover: Is income protection worth it?

Have you thought about what would happen if illness or disability suddenly prevented you from working, even in the short term? Most Australians would struggle to meet ongoing obligations, which is why many decide income protection insurance is worth the expense.

Even if you have a decent amount of savings, this can be quickly eaten away if you are unable to work, particularly if you are supporting a family or have substantial debts. In 2022, the Financial Services Council estimated about 3.4 million Australians were underinsured for income protection.

What is income protection insurance?

Income protection insurance is a safety net. Just like private health insurance or home and contents insurance, you take it out knowing there is a good reason to have it but hoping that you won't need to submit a claim.

 

 

You pay a pre-determined amount a week, fortnight or month to protect yourself from the worst-case scenario - the inability to work due to illness or partial or total disability.

Generally, income protection benefits will be paid each month, based on your income for the 12 months prior to the injury or illness for:

• • Up to 90 percent of pre-tax income for the first six months
  • Up to 70 percent for a specified time after that time

Ensure you know your entitlements before you sign up for a policy. It is important to note that insurers also have their own criteria for what constitutes a partial or permanent disability. Compare policies and their benefits.

Income protection insurance is not automatic, either, so find out what is not covered and what you have to do if you need to make a claim. Read the product disclosure statement (PDS) to avoid any nasty surprises.

Do I need income protection insurance?

This is something only you can answer, as it depends on your personal circumstances. However, there are a few things to consider when deciding. You are more likely to need income protection insurance if:

• • You are the sole income earner supporting a family
  • You are self-employed and unlikely to have sick or annual leave
  • You have ongoing financial obligations, such as a mortgage
  • You have limited or no savings
  • You do not have private health insurance
  • You are not eligible for worker’s compensation
  • You don’t have a good support network

It is possible you already have income protection insurance through your superannuation fund, so double check. You can apply to increase that amount by paying extra each week or month. If you don’t, it may be easier to arrange cover through the fund as you or your employer is already paying into the fund.

Your superannuation may also include a level of total and permanent disability cover (TPD), as well as life insurance, but the level will depend on your circumstances. Don't assume you have enough cover – check your monthly payments and increase the amount if you calculate they will fall well short of what you need to meet your obligations.

 

 

What is an income protection policy?

This is the contract you enter with an insurer to cover you if illness or injury prevents you from working. When you apply for income protection, the insurer will ask you to provide personal details such as your age, income and the nature of your work.

They will also ask questions about your lifestyle and medical history to determine whether they want to insure you, the level of cover and the cost. Factors that could increase your premiums include:

• • Whether you are a smoker or drinker
  • If you have a family history of diabetes, cancer or other diseases
  • If you are involved in contact sport or other high-risk activities
  • If you work in a dangerous area, such as mining or construction

Some may require you to give permission for your GP to provide confidential medical information, so make sure you are comfortable with that. In many cases, you won’t be able to receive income protection without it.

 

 

Income protection policies are either indemnity value or agreed value.

• • Indemnity value – You are insured for a percentage of your salary or wage. If the amount you earn decreases or varies, the amount will be taken as an average.
  • Agreed value – This covers you for a percentage of an amount agreed when the policy was taken out but is only available to customers who did so before 31 March 2020.

The length of your cover will depend on the benefit period on your policy. Most insurers offer between two to five years, or up to 65. There will also be a waiting period before you can claim benefits, ranging from between 14 and 90 days after your doctor has confirmed your disability or illness. The longer the waiting period, the less expensive the premium, but think about how long you can realistically cope without an income, as many insurers then pay a month in arrears.

How much does income protection cost?

Like most forms of insurance, several factors can make income protection cheaper or more expensive, including your age and general health and wellbeing.

You can choose between variable age-stepped premiums or variable premiums:·

• • Variable age-stepped premiums – As the name suggests, these are based on your age and recalculated every time your policy is renewed. The cost of your cover is likely to increase as you age because of the increased risk of making a claim.
  • Variable premiums – These generally cost more at the start of your policy but as they aren’t age-dependent, the increases are generally more spread out.

You can take out income protection insurance through a broker, financial adviser, your superannuation fund, or directly through an insurance company. Whichever method you choose, get several quotes and compare the benefits offered.

 

 

When you’re comparing policies and prices, be sure to compare the waiting period and the benefit period, too, as they determine how soon you can get your money and for how long. If you have a waiting period of 90 days on your policy, for example, and you are off work for 80 days, you may not be eligible for anything.

There are many complaints about insurance companies taking too long to pay income protection benefits to people in need or not paying enough. If you’re having issues with your income protection insurance, or trouble getting an insurer to honour a claim, make a complaint with us and we’ll help you handle it.