Dear Lifehacker, I work full time and my wife has just graduated, so she is working full time too. We’ve got a mortgage but no kids and we thought it was about time to at least investigate life and income protection insurance. After a bit of reading and speaking with people I’m quite confused and unsure! There’s stepped and level premium, income protection, life, total and permanent disability insurances . . Where do I begin and what’s the best way to get the most value? Thanks, Unsure Insurer
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Everyone’s exact circumstances are different, so we can’t give a definitive answer to the question ‘Do you need income protection insurance?’ For specific advice, you should conduct a professional (and impartial) financial advisor. What we can do is look at the main options so your choice is less confusing.
As with any financial decision, you should shop around before making a commitment. There are plenty of insurance comparison sites, including CCAFP, Choosi, iSelect and Mozo. Just bear in mind that those sites won’t necessarily compare every available option; it makes sense to use more than one. You should also check if your bank or superannuation fund provides income protection insurance.
Despite the terminology, the basic aim of most of these policies is the same: to ensure you won’t be out of pocket if an unexpected accident means you can’t earn your regular wage. Income protection insurance provides a regular payout in lieu of your salary, but usually caps that for a given period of time. Disability protection insurance has a similar approach, but won’t necessarily include a time limit. It’s rare to get more than 75 per cent of your current income. Life protection insurance provides a fixed sum if you die unexpectedly. That’s a more common choice for people who have children; here we’ll focus on income protection insurance, since that’s more relevant to your question (and a more likely option for a couple with no kids).
Broadly speaking, there are two types of income protection policy policy. Agreed value pays a fixed sum regardless of what your actual income is. Indemnity value policies verify your income at the time of a claim. The latter are generally cheaper (and often offered via superannuation funds).
There are also two payment types: level premiums and stepped premiums. Level premiums remain the same throughout the policy; stepped premiums increase over time. Level premiums will prove cheaper in the long run, but can be more expensive initially (the original level is set based on your age). Rates will vary based on your gender and occupation; unsurprisingly, smokers pay a lot more.
Whatever you choose, there are some key questions to ask:
- Are there any exclusions or circumstances where the policy won’t pay out?
- How long will you wait for a payout? (Plans with longer waiting periods are cheaper, but that presumes you can cover the gap with savings.)
- Is the amount paid a fixed sum, or based on your earnings the previous year?
Finally, there’s the question of tax advantages. As a general rule, you can claim “income protection, sickness and accident insurance premiums” against your taxable income. That doesn’t make them free; it simply reduces your overall taxable income, which in turn reduces your overall tax bill.
Only you can decide if the cost of income protection insurance is worth the peace of mind, or if you’d rather pursue a savings plan. If readers have strong views one way or the other, we’d love to hear why in the comments.