The importance of income protection insurance

 In Business, Education, Health, Insurance

What is income protection?

Income Protection cover provides you with a regular monthly payment in the event that you are injured and cannot perform your current job for a specified period of time.

How much does income protection cost?

Income Protection varies across a number of factors including your age, occupation and health. As an example an income protection insurance policy may cost approximately $135 per month for a client with the following attributes:

  • Age 30
  • A non-smoking
  • Admin worker $55K salary
  • $4,000 per month of income protection cover
  • 30 day waiting period
  • Benefit payment period to age 65

If the same applicant had applied for cover at age 25, premiums may be approximately $110 per month and could be saving around $12,000 until retirement just by applying earlier for level premiums, the cost of cover may not increase (excluding yearly inflation/premium increases) as they get older.

Why is income protection insurance important?

It is clear to us that having relevant personal insurances in force is absolutely critical in any financial plan. What is the point of putting together a solid financial plan for the future, only to have you suffer a health event and completely cripple away your income and financial position?

When evaluating your need for income protection you must ask yourself the following questions:

  • How would a sustained absence from work impact me financially?
  • Will my family be affected if I was off work indefinitely?
  • Will I be able to maintain my repayments if my income ceased temporarily or over a longer term?
  • How long could I sustain myself if my income was stopped completely?

Did you know?

  • 2 in 5 Australians will suffer a critical I llness By Age 65*
  • 1 in 3 Men and 1 in 4 Women Will Be Diagnosed With Cancer By Age 75*
  • Only 6% of Employees Have Income Protection*
  • Only 31% of Self Employed People Have Income Protection*

What happens if you don’t have income protection?

Without income protection in place, you will need to be able to sustain yourself indefinitely using your investment returns, live off the Centrelink disability pension of $877.10 per fortnight or if available rely on your spouse’s income. However, majority of people do not have the financial stability to do this and therefore, in the unforeseen event you are unable to work, an income protection plan can mean the financial burden to maintain your lifestyle is will be taken care of.

My client’s experience

A recent client of mine had put in place a $7000 per month income protection and held the policy for over 8 years. He had just started an earthmoving business with his wife and was solely dependent on his ability to be able to work for an income for him and his family. He contacted me in January 2017 and explained that he was helping a friend move house and had severely injured his arm in a lifting accident and required surgery.

He was off work for 12 weeks as he could not complete the bulk of his work with only one arm. This could have been financially devastating for them had he not had an agreed value policy in place from early on. With a mortgage totalling $3,500 per month and associated business costs to a total of $1,500 per month we were able to make a successful claim for him and he was able to maintain his business for the short term until he was fully recovered and able to get back to work.

When should I get Income Protection?

You should always talk to an adviser about what type of policy you should set up and the reasons why. Always be open and honest about your finances in these discussions as there are many parameters an adviser would consider to recommend an appropriate policy that more is beneficial to you and doesn’t break the bank. The main tip we would recommend for those contemplating income protection insurance is to set it up as early as possible. The benefits of setting up insurances early are

  • You are setting up the policy at potentially your healthiest part of your life negating the possibility of exclusions and loadings on the policy
  • Locking in level premiums early can potentially save you hundreds of thousands of dollars over the long term. Yes literally hundreds of thousands in insurance premiums over the long term.
  • Setting up an agreed value policy early can lock in the payment rate which is important if you eventually go in to business for yourself later down the line.

Is Income Protection tax deductible?

Yes, if you partially fund the insurance premiums from your bank account you can claim these payments as tax deductible. There are more comprehensive levels of cover you can access by paying insurance premiums outside of super.

However, you can also choose to have your income protection policy inside super and can have your super fund pay for the premiums (cost of the policy) year in year out. These payments will not be tax deductible if your super fund pays for the premiums.

Income Protection insurance is critical in rolling out any financial plan and the planning team at Oak will be able to make a recommendation tailored to your needs that will help you long into the future.

Article written by James Collie, Financial Planner at Oak Financial Planning.

You can read more about James by viewing his profile here 





Valkyrie Private Wealth Management Pty Ltd ABN 78 126 751 335, trading as Oak Financial Planning is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licence and Australian Credit Licensee, 232706 (AFSL), 232706 (ACL).

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