Life Insurance

How Much Income Protection Cover Do You Need – Four Tips for Calculating the Costs

21 May 2020

Life Insurance by Life Stage

The choices you make today can impact your long-term health, wealth and happiness. Understand the important role Life Insurance can play in key life events.

Life Insurance Guides

Please be aware that NobleOak Income Protection as mentioned in this material is no longer available to new customers from 1 October 2021; NobleOak Disability Income Insurance is now available instead. Please be aware that product features and benefits differ. General advice only – Before making a decision to purchase or continue with a product you should read the current Product Disclosure Statement (PDS), Target Market Determination (TMD) and Financial Services Guide (FSG) which are available at www.nobleoak.com.au and consider this information having regard to your own objectives, financial situation and needs.

What is Income Protection Insurance?

Income Protection Insurance is a form of insurance cover triggered when you suffer an unexpected illness or injury that leads to you being unable to work. A typical policy may cover up to 75% of your pre-tax income, subject to certain maximum income levels, for the applicable benefit period under your policy (which is often for 2 years, or until age 65).

Most policies can stay in place until you’re aged 65. This number may even increase in the future based on the national retirement age. Furthermore, the policy will only remain active as long as you meet your obligations regarding payment of premiums. If you miss premium payments, your insurer may choose to cancel the policy.

It’s important to note that income insurance only provides cover when you suffer an illness or injury which prevents you from being capable of working; it doesn’t protect you in the following situations:

You become unemployed through your own volition.
You’re asked to stand down from your role.

As of March 31, 2020, insurers in Australia will only be able to offer Indemnity-based Income Protection. This uses your income, typically the last 12 months’ worth up until a claim arises, as a basis from which to calculate how much you will receive in the event of a claim.

Previously, insurers could offer Agreed-Value Income Protection. This used your income at the time you signed the policy as the benchmark for your payment.

At NobleOak, we’ve always offered Indemnity-based Income Protection. That’s because we believe it to be the fairest form of Income Protection cover.

Now that you know the basics, it’s time to calculate the cost of your policy. These are some tips that will help you.

Tip #1 – Understand the Average Cost Based on Your Income

The cost of your policy will vary depending on your income. Generally speaking, those looking to insure higher incomes can expect to pay more for Income Protection cover. This is because they would also make larger claims, should they need to claim under the policy.

Of course, a number of other factors are at play in determining your premium costs. For example, smokers will usually pay higher premiums because they place themselves at higher health risk.

Tip #2 – Find Out How Your Occupation Could Affect Your Policy Premium

Your occupation will also have an impact on your policy.

Insurers take the risk your job presents into account when quoting a premium. For example, a retail manager may pay less than somebody who works in construction. That’s because the latter worker is generally considered to be at more risk of suffering an accident that disables them.

So your job will tend to affect your Income Protection premium – the riskier your work is considered by an insurer, the higher your premiums are likely to be.

Tip #3 – Understand the Differences Between Stepped and Level Premiums

Stepped premiums tend to start with being less expensive initially. However, they become more expensive with each passing year as you get older.

A level premium will generally have a higher starting premium price. That premium stays in place for the entire duration of the policy, and means that you will actually pay less when you are older (relative to a policyholder who holds a stepped premium policy which is otherwise similar).

Tip #4 – Work Out How Much 75% of Your Income Is

Generally speaking, 75% is the maximum amount of pre-tax income you can be insured for under many income protection policies. Usually, this is also subject to an overall maximum pre-tax income.

Work out how much that is for you and then compare it to your monthly expenses. You may find that 75% covers more than the essentials. If this is the case, you have a decision to make.

You could stick with 75% and pay a higher premium, or you could insured for a lower percentage of your income and pay less for the policy. Of course, considering the latter option only really makes sense for those who are confident that they can get by with a lower percentage of their income.

Help Protect Your Income (And Protect Your Family)

With these basics in mind, you now have an understanding of some of the various factors, such as your health and job type, may affect the cost of your Income Protection cover.

Now consider asking yourself a question…

To insure or not to insure?

That is a question that only you can answer. You may choose to get some professional advice, or to carefully consider your own needs and circumstances and deal directly with a Life Insurer like NobleOak who can provide you with general advice and product information.

This is general information only and does not take into consideration your individual circumstances, objectives, financial situation, or needs.