Income Protection Insurance – what you should know before taking out cover

In NobleOak’s recent whitepaper survey of over 1,000 Australians*, it was found that 35% of respondents ranked Income Protection as the life insurance product they are most likely to take out in the next five years. But what is Income Protection, how has it changed in recent years and what are some of the key things you need to consider before deciding to take out cover?

What is Income Protection insurance?

Income Protection insurance pays a monthly benefit during your benefit period whilst you cannot work due to sickness or injury, helping you support yourself and your family to cover essential living expenses.

If you are in the process of considering taking out Income Protection cover, you may have heard that there were some industry wide changes in Australia which occurred in October 2021.

What did these changes entail?

To deliver better outcomes for customers, APRA (the Australian Prudential Regulation Authority, a key regulatory body which supervises insurance companies, banks and other similar institutions in Australia) advised all life insurance companies that from 1 October 2021, some changes were to be implemented to make income protection products more sustainable.

These included:

• Ensuring benefits do not exceed the policyholder’s income at the time of claim.
• Ensuring effective controls are in place to manage the risks associated with longer benefit periods (e.g.: policies paying benefits up to age 65).

Why might you need Income Protection insurance?

Having Income Protection cover in place can help ensure your family will not be left with a major financial burden if you’re left without an income due to disability. For example, your monthly benefit payments may be used to help you:

• keep up with your rent or mortgage payments
• cover your ongoing bills and everyday expenses; or
• avoid relying on family or friends for financial support.

Some Key Features and Benefits of Income Protection insurance

Following is a summary of some of the main features of Income Protection cover after the 2021 changes were implemented (note: these may vary somewhat depending on the life insurer and the particular product).

You can insure a proportion of your income

All Income Protection products now on sale offer what is known as ‘Indemnity Value’ cover, which provides a monthly benefit based on a percentage of your Income at the time you make a claim.

The maximum amount of income that you can insure will generally range upwards from 60%. This will depend on the terms offered by each insurer. You can also choose to insure a lower amount, depending on your personal needs.

If your insurable income has reduced since your policy was issued, this may mean the monthly benefit you receive in the event of a claim could be less than the benefit you expect. Alternatively, if your insurable income has increased and you have not updated your cover to reflect this, the monthly benefit you receive in the event of a claim will not reflect the increase to your insurable Income.

It’s important to regularly review the suitability of your sum insured and keep in touch with your insurer to amend this if required.

You receive monthly benefit payments

Monthly Benefits are payable after a waiting period if sickness or injury mean you need to stop working. Benefits are payable for the benefit period that applies to your cover and are only payable whilst you are unable to work due to sickness or injury. If you are partially disabled, benefits are generally payable in your benefit period while you are able to perform only limited work or duties and suffer a reduction in earnings beyond a certain threshold. With most policies, in the case of a claim, you would be assessed on your inability to perform work duties. The criteria of this assessment will vary between insurers and may change after a certain period of time ‘on claim’.

The criteria may include:

• Your ability to perform all or some of the duties of your ‘own occupation’ or your ‘regular occupation’.
• Your ability to perform all or some of the duties of occupations for which you are suited or capable of performing, based on your education, training, or experience.
• Additional assessments after being ‘on claim’ for 24 months.

When considering a policy, always read the terms in the Product Disclosure Statement carefully, as there are differences between policies, including for these criteria as well as the definitions of total and partial disability. With NobleOak’s income protection cover, you first need to be totally disabled (for at least the first 14 days of the waiting period) before a benefit for partial disability is payable.

You will need to be disabled for a minimum period (Waiting Period) before a benefit is paid

At the time you apply for cover, you will typically have a choice of waiting periods before a benefit is paid – for example, with NobleOak’s Income Protection cover (which is called Disability Income Insurance), waiting periods of 30 or 90 days are available.

Your benefit is payable for a maximum length of time (Benefit Period)

These can also vary between insurers, with NobleOak’s Income Protection cover providing available benefit periods of 2 years, 5 years or up to age 65. This gives customers the option to combine a short-term benefit period (i.e.: 2 years or 5 years) with TPD cover as (depending on their needs and circumstances) this may be more cost effective than selecting a longer benefit period such as to age 65. Also, keep in mind that during the Benefit Period, in income protection benefit is payable only whilst you continue to meet the relevant disability definition.

Your benefit may include inflation protection

NobleOak’s Income Protection cover provides a degree of inflation protection for when you are on claim and receiving a Monthly Benefit – after each year on claim, your benefit is increased to help protect you against the rising cost of living. Some insurers also provide protection against inflation with the sum insured being increased automatically, usually reflecting movements in the CPI. This also increases the premium payable.

NobleOak’s Income Protection also supports your recovery

NobleOak believes it is important to support our customers in their recovery. If you are receiving Income Protection claim payments from NobleOak, we may approve certain additional expenses to help you return to work. If your healthcare provider recommends a rehabilitation or retraining plan, and NobleOak pre-approves the costs, we will reimburse you for these expenses to help you get back on your feet.

Premiums are generally tax deductible

The good news is that Income Protection premiums are generally tax deductible.

According to the Australian Taxation Office you can claim your Income Protection Insurance premiums in your annual tax return. However, any payments you receive under your cover as a monthly benefit if you have made a claim must be declared on your tax return, as they are classified as income.

When premiums are not tax deductible

There are some instances when premiums are not tax deductible and these include:

1. Income Protection policy premiums for cover provided through a superannuation fund are not deductible if the premiums are deducted from your super contributions.
2. In a combined policy which includes Life and Income Protection cover, only the Income Protection portion of the premiums is deductible.
3. In the case of policies which pay a lump sum to compensate you for illness or injury, premiums are not deductible.

Circumstances tend to differ, so it’s a good idea to check tax matters with your accountant. Also, different rules apply for self managed super funds (again, your accountant should advise on these).

If you’re thinking of taking out Income Protection cover and would like more information on NobleOak’s Income Protection product, please call us on 1300 041 494 or get a quote here.

Note: You should read the PDS for the product, which provides more detail on the benefits, features, limitations and exclusions discussed in this blog.

*Independent research conducted nationally by PureProfile Australia Pty Ltd in December 2022 with over 1,000 Australians aged between 30 and 60.