As part of delivering advice to clients we are frequently asked about the various insurance covers we recommend. We have put together a list of our 7 most common questions about income protection, to help you understand it a little better.
Is Income Protection Tax Deductible?
The premiums you pay for your income protection policy are generally tax deductible, if they are paid by you personally. However, if the premium was paid for from a business account or from a superannuation fund, then the premium would not be tax deductible to you personally.
Importantly, because the premium is tax deductible the income you generate from any policy claim is considered as taxable income.
Why do I need income protection – I have sick leave (and what about the Disability Pension?)
Sick leave should always be considered as part of an income protection policy. For example, if you have built up a lot of sick leave (and annual leave/long service leave) this can be taken into consideration when the policy is recommended to you.
However, while you may have sick leave/annual leave for the short term, not many people have sick leave that pays them until they reach age 65. This is where Income Protection is beneficial – as it can pay out for many years after you cease working as a result of illness or accident.
As for the disability support pension – this amount is very minimal and it is unlikely this will be anywhere near what you received previously if you have been working full time for a number of years. As at October 2016, the maximum disability pension for a single person, including the maximum Pension and Energy supplement, was $877.10* per fortnight or $438.55 per week. For many people this amount will not be sufficient to meet the ongoing expenses of the lifestyle they currently live.
Can I hold it in my Super Fund?
It is possible to have your income protection held in a super fund. While your premiums will be paid for from your fund, the policy you hold may not be as comprehensive, compared to if you held it personally. The downside here is that it is harder to successfully make a claim.
However, there are options available to get the best policy and have a portion of your premium paid for from your fund.
Why should I supply full medical history when applying for the policy?
Because you can claim on your income protection for both accident and illness most insurers require an understanding of your medical history, before insuring you so they can offer you the right premium in line with your health.
Some insurers do not ask for this information upfront – leaving it until you make a claim. This means you may find out the policy is no good – after it’s too late.
Our suggestion is you complete the full medical questionnaire when applying for the policy and you know where you stand in relation to what you are covered for and more importantly what you are NOT covered for
How can I reduce my premium?
There many ways to reduce your premium and it comes down to a discussion between you and your adviser. But there are common ways to reduce your premium.
1. increase your waiting period (the time you have to be off work before claiming) or
2. decrease the benefit period (time the insurer pays you after making a claim).
3. Reduce the amount you are covered for
You can ask your adviser to shop around for a better premium with another provider. You can also look at having a portion of your income protection in your super fund – but don’t forget this will erode your retirement savings.
Do Insurance companies actually pay claims?
One of the important roles of an adviser is to monitor which companies are performing well and paying claims. After all, an adviser who recommends a particular company is in effect putting their reputation on the line. No adviser wants to see a legitimate claim knocked back.
Experience suggests that claims do get paid, and often. Unfortunately, stories about non-claims are common in the media, but rarely are these stories countered with the number of claims that are paid. However, most reputable insurers do publish their claim statistics, to give advisers and consumers an idea of how much has been paid out in the past 12 months. In recent years the larger insurance companies have EACH paid out in excess of $800 million every year in claims for life/TPD/criticall illness and Income Protection insurance.
How much cover can I get?
As a rule, you should be able to get up to 75% of your income insured without too much hassle. It is even possible to get your super contributions insured as well, bringing your total insurable income to around 84% of your salary package. If you have extra things such as a car or other bonuses an adviser can talk to the insurer for you and negotiate the maximum insurable amount.
If you own a business you may even be able to cover some of your regular expenses, such as utilities and rent.