If you are unfortunate enough to suffer a disability or are unable to work due to illness or injury in Australia, income protection insurance will compensate you with a maximum of 70% of your lost earnings. It represents a safety net quite unlike any other in the insurance world and is something more and more Australians are paying attention to. This article is not designed to help you decide whether to take out income protection insurance. The simple answer is, ‘If you can afford it, you should take it’ and breathe a sigh of relief knowing you are protected. We will instead take a closer look at factors affecting that policy and how they might play a part in your decision and overall experience.
Health, employment, and lifestyle disclosures
Any insurer will require full disclosure of health issues and lifestyle choices before committing to offering you an income protection insurance policy. Remember, you risk complete nullification of your policy if you fail to answer openly and honestly. Details may include, but not be limited to:
- Pre-existing medical conditions – A comprehensive breakdown of your medical history.
- Employment – Details of your job, workplace, and the risk level you are exposed to. For example, miners at the McArthur River Zinc Mine should expect to pay higher premiums due to the inherent dangers associated with the work.
- Lifestyle – From levels of exercise and engagement in any dangerous activities to smoking and drinking habits.
The waiting period mentioned in any income protection insurance policy refers to the length of time you must wait between suffering the illness or injury that prevents you from working (Date of Disablement) and the date payments commence. Standard choices are 4, 8, or 13 weeks and can affect the final amount of your premium significantly.
The benefit period you will see mentioned is the period you wish to cover yourself for and receive monthly payments in the event of any successful claim. These are typically set at 1, 2, or 5 years and once again should be expected to affect the overall premium.
Income protection insurance is also available to self-employed Australians, provided they are working between 20 and 30 hours per week (depending on their occupation). It is a facet of this type of policy key to the decision-making process of those who work for themselves. Lacking the protective sick leave an employer is legally required to provide in Australia, they are more vulnerable to suffering lost earnings if incapacitated and unable to work.
Tax liabilities and deductions in Australia
- Income protection insurance payouts are subject to normal taxation.
- It is important to check whether tax has already been withheld on your payout.
- Tax payments will not be automatically withheld from any funds received directly from insurers. You must declare income protection insurance payments to the Australian Taxation Office (ATO) on your annual return.
- Premiums paid to acquire income protection insurance are typically tax deductible, unlike other forms of insurance, as they are directly related to your income.
The overriding message is, to check all the details before you choose the right policy and seek professional guidance if in any doubt.