IEU advice: Do you need income protection insurance?
Even after market shocks like the recent hit from Trump’s tariff announcements, which wiped up to 4% off some superannuation balances, most experts said don’t panic, stay the course.
It’s largely sage advice. But that recent shock to retirement savings serves as a timely reminder to review our financial safeguards, given how vulnerable they are to the fluctuations of the stock market.
And one important but often overlooked topic for union members is income protection insurance.
What is income protection?
The federal government’s moneysmart.gov.au site says it simply enough: Income protection “pays part of your lost income if you can’t work because of illness or injury”.
Consumer advocacy site Choice says, “Most people get total and permanent disability (TPD) insurance automatically in their super. This is designed to provide financial assistance when you can't ever work again because of illness or injury. Income protection insurance is more for short-term injuries or illness.”
That’s our italics, there – it’s important to understand this product so you don’t pay for it unnecessarily, or, worse, think it covers you when it doesn’t.
If you're unable to work due to partial or total disability, income protection insurance pays:
up to 90% of your pre-tax income in the first six months, and
up to 70% for a specified time after six months.
Income protection insurance is designed to replace your income based on your annual earnings in the 12 months prior to your illness or injury.
It is especially important to consider if you have family members or dependents that rely on your income or you have debt, such as a mortgage, which you'll need to make payments on even if you're unable to work.
Moneysmart suggests you prepare a budget to work out how much income protection you need. This will identify your monthly expenses and the income you'll need to replace. You may want to factor in making payments to your super as well.
Also consider:
If you have total or permanent disability or trauma insurance, that can help replace lost income
If you have private health insurance that could help pay for any medical expenses
What help or support from family or friends may be available.
Don’t get a rude shock
Consumer advocacy site Choice points out, “Income protection is, in most cases, an 'add on' to the insurance you automatically get in your super”.
However, income protection insurance DOES NOT provide you with financial support any time you lose your income. For example, it didn’t pay out for those who lost work because of the economic disruption caused by COVID-19 t only pays a benefit where you can't work because of an illness or injury.
Waiting for super income protection
Having extra income protection insurance is useful, however, to ensure you get regular payments from your income protection insurance while you wait for your TPD lump sum from your super insurance. Choice says income protection insurance can also be useful “where what initially appeared to be a short-term injury is later diagnosed as permanent”.
Instead of a lump sum, income protection generally pays you on a monthly basis to cover part of your lost income.
What union members should know about income protection insurance
1. It can significantly reduce your retirement savings
The Productivity Commission found that some people are automatically signed up to income protection policies they can’t claim on—costing the average worker around $25,000 of super over their lifetime.
2. It only covers specific situations
Despite the name, income protection only covers illness or injury that prevents you from working. It does not cover redundancy or unemployment, and workers in 'hazardous occupations' may be limited in cover or excluded altogether.
3. Payments are limited
Most policies pay only up to 75–85% of your pre-disability income, and part of that may go into your super.
Benefits typically stop after two years, unless you pay higher premiums for extended cover.
You can't claim until after you've used up your sick leave (and sometimes annual leave).
4. You may not be able to claim on multiple policies
If you’re paying for cover in more than one fund, you’ll likely only be able to claim from one, due to “offset clauses.” This catches many members by surprise.
5. Coverage may change with your circumstances
Changing jobs, salary increases, or buying property are good times to review your cover.
Default cover usually includes pre-existing conditions, but extra cover may not.
6. Waiting periods apply
There’s often a 30-day waiting period before benefits kick in, unless you pay extra for a shorter wait.
7. Other income reduces your benefit
Payments from Centrelink or workers’ compensation will likely reduce your insurance benefit dollar for dollar.
NB: Please consult financial experts if you are considering any significant financial decisions.
LINKS:
https://financialrights.org.au/factsheet/accessing-your-superannuation-early/
https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance