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It can be challenging to know how much income protection insurance you need to provide for you and your family in an unfortunate event. But it’s essential to calculate and secure the right amount to avoid any possibility of under insurance.
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- It can be challenging to know how much income protection insurance you need to provide for you and your family in an unfortunate event. But it’s essential to calculate and secure the right amount to avoid any possibility of under insurance.
- What Is Income Protection Insurance?
- How Much Income Protection Cover Is Needed?
- How Are Income Protection Premiums Calculated?
- How Are Income Protection Benefits Determined?
- Income Protection Insurance Calculator: What Does It Do?
- How Much Does Income Protection Insurance Cost?
- What to Consider in Addition to the Income Protection Insurance Calculator
- References
Many Australian residents hold income protection insurance as part of their superannuation (super fund), so purchasing an additional policy and effectively doubling up on insurance is rarely a great idea.
However, with the rising cost of living and many families already struggling to make ends meet, income protection insurance is essential in terms of protecting your family’s lifestyle. Not to mention your immediate financial future, should something unfortunate occur that would see you unable to work, such as illness or injury.
In this article, we take a look at what income protection insurance is, how much income protection cover you need, the factors you need to consider before purchasing an income protection insurance policy, and how an income protection calculator can assist you to calculate the amount of cover that is suitable for you and your family.
What Is Income Protection Insurance?
Income protection insurance is insurance which provides a benefit payable to you if you are temporarily unable to work for a certain period of time due to illness or injury.
Income protection insurance is also a safeguard for your family and may also pay a benefit where you are partially or totally disabled. This payment would be in place before potentially receiving a total permanent disability (TPD) payment benefit.
An income protection insurance indemnity value policy typically covers a certain percentage of your income. It is paid in regular intervals until you can return to work.
Income protection insurance benefit payments will be paid to you for a period of time which will be determined by the terms and conditions of your policy.
How Much Income Protection Cover Is Needed?
The amount of income protection insurance you need will depend upon your circumstances and financial needs. It is worth noting that typically, income protection insurance will not cover your entire wage but only a percentage.
Generally, income protection insurance will only cover up to 70% of your income. Some policies do offer up to 85% cover. However, the additional 10% is generally the payment of a superannuation contribution. It is unlikely that income protection insurance would cover more than 70% of your income.
For some individuals, such as those with no mortgage or substantial living expenses, receiving an income protection benefit of 70% of their salary will be surplus to their needs. As such, it is possible to purchase a policy where the benefit percentage payable is less than 70%.
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Call Our Team TodayHow Are Income Protection Premiums Calculated?
There is no set formula in terms of calculating income protection insurance premiums, with insurers considering many factors in determining premiums, including:
- Age
- Gender
- Occupation
- Overall health
- Smoking status
Stepped vs Level Premiums
Your stepped or level premiums will also impact your income protection insurance premium calculation. Stepped premiums increase over time, generally with age, with level premiums remaining constant.
Stepped premiums may offer short term affordability, whereas level premiums tend to be more expensive initially. But as they do not increase over time, they benefit from being budget-friendly and can be a more cost-effective premium option for those looking for long term cover.
How Are Income Protection Benefits Determined?
In the event of illness or injury, which sees you unable to work and therefore eligible to receive a benefit from your policy, the amount that you will be paid will be determined by several factors, including:
- Your level of cover
- Any other sources of income, including eligibility for Centrelink benefits and workers’ compensation
- Whether you are totally or partially incapacitated those who can work to a certain extent are ineligible for a full benefit payment.
Income Protection Insurance Calculator: What Does It Do?
An income protection insurance calculator will give you an accurate estimate of what you can expect to pay for income protection insurance, considering your circumstances and financial needs.
How Much Does Income Protection Insurance Cost?
In Australia, the average cost of income protection insurance varies due to personal circumstances, age, gender, occupation, health, and smoking status.
A female aged in her 30s who is a non-smoker can expect to pay around $65 per month, whereas a male of similar age, who is also a non-smoker, can expect to pay, on average, $49 per month for the same level of cover.
What to Consider in Addition to the Income Protection Insurance Calculator
- Waiting period – the period of time you must be off work before you become eligible to receive a payment. Generally, once eligible, the first payment will be made the month following the expiration of the policy waiting period.
- Benefit period – the amount of time that the insurer will pay the benefit to you. The longer the benefit period, the more expensive the premium.
- Ownership – Do you own and pay for your policy personally? This is usually the case if you have purchased directly from an insurance company, insurance broker and sometimes through a financial adviser. It’s vital to cosnoder if you can claim a tax deduction on your income protection policy.
- Superannuation owned – alternatively, is your IP policy owned through your suepr fund? It’s important to regularly review your policy benefits and details if it is held through your super fund.
Before purchasing an income protection insurance policy, you should carefully and thoroughly read the policy product disclosure statement (PDS).
The Importance of Calculating How Much Cover You Need
Though it can be challenging to work out the ideal benefit amount, you must do so before applying for insurance cover.
Make sure that the level of income protection cover you have will be sufficient for you to manage financially in the event that you’re unable to work.
Do You Need 70% of Your Income Covered? Can You Receive a Smaller Benefit?
Deciding if you need the full 70% of your income covered depends on your total monthly expenses.
Can You Have More Than 70% Of Your Income Covered?
Some insurers say that the maximum monthly income that can be covered is 70%. However, other insurance providers offer options to increase your monthly benefit.
When Won’t An Income Protection Benefit Be Paid?
Your insurer wouldn’t pay your insurance claims and give your income protection benefits if your claim related to an incident where you were driving under the influence of alcohol.
Check the relevant product disclosure statement (PDS) for a full list of cover exclusions. The policy’s PDS should answer FAQs on eligibility criteria.
Is Having Income Protection Insurance Worth It?
It is worth having income protection insurance if you are a small business owner, self-employed, or have dependents or debts, such as mortgage repayments.
But first, you must check the target market determination (TMD) to determine if an income protection insurance or a particular insurance product applies to your financial situation.
Also, consult someone from your insurance company or a qualified financial adviser for general advice regarding:
- Insurance quotes
- Investment options
- Taxable income
- Tax rate
- Tax return
- Tax-deductible income
- Income tax
- Medicare levy
And be sure to transact only with financial service providers with an Australian Financial Services Licence (AFSL). Also, look for any disclaimers on their website.
Calculating income protection insurance can be complex. An appropriately licensed insurance company or financial adviser can help you determine the maximum monthly benefit available based on your annual income earned during a financial year.
For enquiries about income protection insurance calculators, life insurance calculators, premiums and life insurance policies, the team at My Money Sorted can help.
Still not sure where to start, or want help securing the right insurance faster?
That’s okay!
Many people may be unaware of this…but just like you, 41% of Aussies intend to get financial advice rather than going it alone, according to an Australian Securities and Investments Commission (ASIC) report.
You can reach out to My Money Sorted to guide you for free before you seek professional advice from an insurance expert!
When you book a call with My Money Sorted, you’ll:
✓ get a better understanding of your money matters
✓ have an idea of your money goals
✓ be matched with the right insurance expert who can help simplify your search for an insurance policy that fits your needs
My Money Sorted is your stress-free pathway to getting ahead with your money. Here’s what your journey will look like:
Step 1: Start off with a quick money matters session with My Money Sorted
Step 2: Get matched with a Insurance Expert that’s right for your money situation
Step 3: Take the first step towards getting the protection you need with a clear and sound roadmap prepared by an Insurance Expert
It’s that easy!
I want to see all my options with the help of a Finance Expert
Call Our Team TodayReferences
- Income Protection Insurance
https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance
- Income Protection Insurance Comparison
https://www.canstar.com.au/life-insurance/income-protection-insurance/
- Compare Income Protection Insurance
https://www.finder.com.au/income-protection
- How Does Income Protection Insurance Cost?
- Income Protection Insurance Calculator
