Is Income Protection Worth It? The Pros And Cons

If you became unwell and were not able to work for a long period of time, could you still keep up with your living expenses?

Income Protection Insurance provides some financial protection if you suffer an illness or injury that prevents you from working. It could be a particularly valuable investment if you have a family to support.

In this article, we’ll explore what income protection is, some key consideration factors, and weigh up the pros and cons to help you make an informed decision on whether it’s worth it for you.

Key takeaways

• Income protection can be worth it if you rely on your income and couldn’t manage long without it
• It may be most useful for those who don’t have a lot of leave entitlements or alternatively those that have a strong reliance on their income to pay everyday expenses. Policies typically replace around 60 – 70% of your income if you can’t work
• It may be less necessary if you have strong savings or very good employer benefits
• Whether it’s worth it, will depend on your income, savings, and risk profile

Income protection insurance defined

Income protection is a type of insurance that can act as a partial salary replacement when you can’t work due to an accident or illness. If you want to protect some of your income from unforeseen health problems that might arise, income protection might make sense for you.

Before you take out a policy, it’s good to be aware of the following:

• Your occupation: If you work in an occupation that’s considered high risk (such as construction or mining) it might be harder to obtain income protection insurance or premiums could be more expensive.
• Level of coverage needed: How much of your income would you need to replace to cover your living expenses, if you were unable to work? Policies typically cover between 50% to 75% of your income.
• Length of benefit period: The ‘benefit period’ is the amount of time the financial benefits will be paid whilst you are unable to work. Typically, you can elect from a choice of benefit periods when you take out cover (e.g. 2 years, 5 years, or to age 65).

“Depending on the policy, the financial coverage might extend to more than just part of your salary. For example, some policies provide for a contribution towards rehabilitation or retraining expenses.”

– Miguel Cortes, Senior Manager, Direct Product & Propositions, NobleOak

Is income protection insurance worth it for me?

Given the rising cost of living in Australia, it’s reasonable to ask whether income protection is worth it for you. Below are some points to consider when making your decision.

Income protection is likely worth it if you…

• Have a lot of debts such as a high mortgage
• Rely on a single income
• Have limited emergency savings

Income protection may not be worth it if you…

• Are close to retirement

Example scenarios

The examples below show how income protection insurance may work in different real-life situations.

Scenario 1: Single-income household employee

If you earn $80,000 per year and can’t work for six months due to illness or injury, you could lose around $40,000 in income. An income protection policy replacing 60 – 70% of your income could help provide between $24,000 and $28,000 depending on your chosen waiting period.

Scenario 2: Self-employed professional

If you’re self-employed earning $100,000 per year and unable to work for three months, you could lose around $25,000 in income. Income protection may help replace part of that income once the waiting period ends.

Scenario 3: Strong savings and dual income

If your household has 12+ months of savings and two incomes, a temporary loss of income may be manageable without insurance. In this case, income protection may offer peace of mind but be less essential in the short term.

Benefits of income protection insurance

Do I need income protection insurance? Are the benefits worth the premiums?

Let’s take a look at the key advantages to see if this financial product may be right for you:

1) Financial stress may be reduced

One of the biggest benefits of ​income protection insurance is being able to focus on recovering from your illness or injury – without having extra worries about money.

Receiving a steady influx of benefits makes it possible to pay your bills and provide for your family. This helps to alleviate stress, and it can also help protect your long-term savings and investments.

2) Income protection can cover a portion of your income

NobleOak’s Income Protection Insurance covers up to 70% of your income (up to a certain monthly limit) for a set period of time depending on the insurer. For most people, that’s enough to cover day-to-day expenses.

Please note that the coverage amount will depend on the insurer, your policy, the premiums you’re willing to pay, and you’ll need to know that the benefit period is also likely to vary.

3) There are several ‘benefit periods’ available

The benefit period is the length of time during which your insurer will pay out benefits if you are unable to work due to illness or injury. You can opt for short-term coverage, with a benefit period of 2 years or less (as long as you’re still unable to work during that time). The shorter the benefit period, generally the more affordable the policy becomes.

You might also be able to opt for a longer benefit period. In some instances, it might be possible to get coverage where you’ll receive payments up to a certain age. Some income protection policies facilitate coverage up to age 65 (or until you can go back to work, if that happens first).

NobleOak has very flexible benefit periods, including 2 years, 5 years, 10 years and up to age 65.

4) Income protection can cover the cost of rehabilitation if you injure yourself

Income protection insurance can cover many expenses if you were to become unable to work because of sickness or injury. You’ll be able to use the benefit payments as you please. It’s possible for a policy to also provide coverage for things such as rehabilitation or retraining expenses.

When asking for an ​Income Protection quote, it may be a good idea to find out which rehabilitation expenses and what types of retraining options might be covered under the policy terms you are considering.

5) You can usually agree to a longer waiting period to reduce your premiums

If you’re worried about the cost of income protection insurance, there are ways you can make the monthly repayments more affordable.

These usually include:

• Waiting period length: The ‘waiting period’ is the amount of time you’ll need to wait (whilst you are unable to work) before you start receiving payments. This may be as long as three months, in some cases. In most cases, the longer the waiting period, the lower the premium.
• Benefit amount: During the application process, you’ll get to choose how much of your income you’d like to receive coverage for. When you opt for a larger benefit, the insurer takes on more financial risk in the event of a claim, which is reflected in the increased cost. Conversely, choosing a lower benefit amount can reduce premiums.
• Benefit length: You can also choose the length of time you will receive a benefit for. This will affect the cost of your premium. If you choose a shorter benefit period, your premium will be less than if you decided to take out a longer benefit period.

Drawbacks of income protection insurance

This section will unpack some of the downsides of income protection insurance. For example, is it worth it in situations where you already have a medical condition, or if the policy has exclusions? Let’s take a look.

1) Having a pre-existing medical condition can raise your premiums

Pre-existing medical conditions can increase your income protection premiums (or in some cases mean that you cannot obtain cover at all). Here are some common examples:

• Chronic illnesses: Includes conditions such as diabetes, heart disease, and asthma.
• Mental health issues: If you have a history of depression, anxiety, or other mental health disorders.
• Previous injuries: Past significant injuries – such as back problems or joint issues – could increase the likelihood of future claims.
• Autoimmune disorders: Conditions like rheumatoid arthritis or lupus that may lead to prolonged periods of disability.
• Obesity: Being significantly overweight can increase the likelihood of other health complications like hypertension or sleep apnoea.
• Cancer history: A history of cancer, even if currently in remission.

Similarly, if you have a high-stress or dangerous occupation, your insurer might raise your premiums or may not be able to cover you. This is because there’s a higher chance that you’ll need to make a claim as a result of being unable to work due to illness or injury. You should take these factors into account when questioning if income protection insurance is worth it.

2) Your policy may have exclusions

Income Protection Insurance policies often come with exclusions – i.e. specific conditions or situations that the policy doesn’t cover. Common exclusions may include participation in criminal activity, or claims arising from intentional self-harm.

It’s also important to be aware that income protection insurance doesn’t respond to employment termination for reasons other than an insured disablement condition. If your employer terminates your employment or you are made redundant for reasons other than an insured disablement condition, you will not be eligible to make a claim.

The full list of exclusions and limitations for NobleOak’s Income Protection cover can be found in the NobleOak Premium Life Direct PDS.

So, what should you do?

Ultimately, whether income protection is worth it, depends on your income, savings, job security, and how long you could manage without pay.

If you’re unsure, reviewing your personal situation, including how much you earn, what you could afford to lose, and how long your savings would last, is the most practical next step.

Find more advice and useful tips on the factors that may influence the cost of an income protection policy using this useful guide: How Much Income Protection Cover Do You Need

Award-winning income protection insurance

Taking out life insurance products such as income protection may be one of the most important financial decisions you can make. To find out more, visit the NobleOak website, call one of our NobleOak Life Australian-based insurance specialists on 1300 014 494 or start a quote online.

Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.