Income Protection insurance aims to minimise the financial impact of sickness or injury by replacing income lost during a prolonged absence from work. A monthly benefit will assist you to meet living expenses and debt repayments. Income Protection insurance premiums outside of super are generally tax-deductible.
Income Protection policies will usually pay a benefit up to 70% of your gross income (some policies may pay higher) after a waiting period. Payments continue for a set term or until you return to work, whichever occurs first.
Waiting Period and Benefit Periods
Waiting Period
The waiting period for an Income Protection policy is the length of time you must wait until you receive payments. The waiting period can vary from 14 days to 30 days to 90 days to 2 years. You can select your waiting period when taking out your policy. When choosing a waiting period, it’s important to consider any sick leave and related benefits provided by your employer. Your selected waiting period will impact the level of insurance premiums you pay for your income protection policy. A shorter selected benefit period results in a higher premium.
Benefit Period
Your Income Protection benefit will continue to make payments if you are unable to work and up until your income protection benefit period. Benefit periods can vary from 2 years to 5 years to up to your 65th birthday. The longer your benefit period, the longer your protection in the event of disability. However, the longer selected benefit period results in a higher premium.
Types of contracts
Agreed value
The monthly benefit is agreed at the time of application and will not reduce even if your income decreases after your policy commenced. This option provides certainty and peace of mind on how much income you will receive. If details of your income are provided at the time of application the benefit can be guaranteed so that no further financial assessment is required at the time of claim. Agreed value contracts are not available to new policy holders from 31 March 2020, however existing policy holders with an agreed value policy will still be able to increase their benefit amount.
Indemnity value
The monthly benefit paid may differ to the monthly benefit insured as it will depend on your earnings at the time of a claim. The monthly benefit received will be based on your gross income at the time of claim up to the monthly benefit insured. Details of proof of income will be required at the time of claim.
Premium Types
- Stepped – Premiums are recalculated each year as you get older and/or with changes to inflation.
- Level – Premiums increase each year with inflation
Funding Options
Income Protection insurance is available both inside and outside of superannuation (including SMSFs)
Income Protection Insurance Inside Superannuation
Most superannuation funds offer insurance for their members. There are many benefits of this ownership structure however there are also disadvantages you should be aware of.
Advantages
- Can help to manage cash flow. Premiums are funded through your superannuation balance and through contributions to your superannuation fund.
- You can make personal concessional contributions or salary sacrifice contributions which will provide tax benefits and provide cost savings on premiums.
- Premiums funded through rollover of superannuation monies may be entitled to a 15% premium rebate. This 15% rebate represents the tax concession the fund trustee receives from claiming a tax deduction on premiums paid, which is passed back to members.
Disadvantages
- You can not claim a personal tax deduction directly on premiums paid for income protection inside super
- In the event of a claim, in addition to meeting the insurance policy definition of incapacity, you need to satisfy a superannuation temporary incapacity condition of release before the funds may be paid to you.
- Premiums can erode retirement savings if you do not make extra contributions to negate premium costs.
- There are restrictions on benefit payments if you are unemployed or on unpaid leave
Income Protection Insurance Outside of Superannuation
Owning income protection outside of superannuation can provide you with more product features and flexibility when compared with owning insurance inside superannuation.
Advantages
- Premiums are generally tax-deductible.
- Policies can provide more comprehensive coverage, including ancillary benefits such as trauma, rehabilitation expenses, relocation benefits and carer costs.
- May be able to exchange ongoing payments for a lump sum benefit.
Disadvantages
- If the income protection policy provides for benefits of an income and capital nature, the ATO’s view is that only that part of the premium attributable to the income benefit is deductible.
- Premiums are payable from cashflow which will lower your net income
Is Income Protection Insurance Tax-Deductible?
The portion of income protection insurance premiums attributable to replacing your income in the event of disability is tax-deductible when the income protection insurance is paid through your cash flow.
You cannot claim a deduction for a premium or any part of a premium that you paid under a policy to compensate you for such things as physical injury. Life insurance, trauma insurance and critical illness insurance are policies for which premiums are not deductible.
Income Protection premiums paid in superannuation are not eligible for a personal tax deduction.
Further, Income Protection claims are taxable income.
Taxation law is complex, and the ability to claim tax deductions for premiums may depend on the type of policy and benefits covers you have. So we recommend you seek tax advice specific to your circumstances from a tax adviser or registered tax agent.
What Income Protection Insurance does not cover?
The Income Protection benefit will be payable if the claim arises due to:
- An intentional, self-inflicted act by the Life Insured;
- In the event of employment termination or redundancy.
- A standard and uncomplicated pregnancy, miscarriage or childbirth.
- War or an act of war, even if the disability occurs after the War or warlike activity;
- Participation in a criminal act and/or for any period of incarceration due to involvement in a criminal act; or
- Permanent or temporary banning, deregistration, disqualification, or restriction on the Life Insured from performing all or some of the duties of their Working Occupation.
Other insurance covers you may wish to consider include Life, TPD and trauma insurance.
Protecting your family and lifestyle in the occurrence of an unforeseen event is a crucial step in managing risk to your financial well-being. Read about our insurance services here.