Income-insurance products have changed for the better and now might be the ideal time to investigate.
If you have been thinking about taking out income-protection insurance, then the end of the financial year is a good time to bite the bullet. Not only have income-protection products improved in recent years but policies taken out before June 30 may come with a handy tax deduction.
Income-protection insurance provides monthly income if you are unable to work because of sickness or injury. You can buy income protection through a financial adviser or direct from the insurer but cover is also available through your super fund.
One advantage of income protection outside super is that premium payments are tax deductible. This means you can pre-pay 12 months’ premiums before June 30 and bring forward the tax deduction to the financial year the payment is made.
If you earn $100,000 a year and pay tax at the marginal rate of 38.5 per cent (including Medicare), for every $100 of income-protection premiums you pay in advance your taxable income reduces by $100, saving $38.50 tax.
Individuals can’t claim a tax deduction for income protection held inside super but premiums are cheaper because super funds negotiate group rates for members.
Even so, the chief operating officer of SuperRatings, Nathan MacPhee, says some funds pass on the tax deduction they receive at the fund level to their members in the form of a reduced contributions tax.
Most industry funds and all retail funds offer income protection. Retail funds have offered more choice and flexibility for longer but industry funds have been closing the gap.
The director of Rice Warner Actuaries, Richard Weatherhead, says the median cost of income protection from industry and public-sector funds is 39 per cent lower than the median cost of adviser-sold products; the median corporate fund is 28 per cent cheaper than adviser-sold products, while the median direct life product costs 10 per cent more.
Simple products sold without underwriting and medical checks are cheaper but generally come with more restrictions and lower benefits. The cost of cover depends on the level of benefits, the maximum benefit period, your age, gender, occupation and smoking status, a waiting period before claims can be paid and optional extras. For example, Weatherhead says a 35-year-old male non-smoker in a clerical occupation, with an income-protection benefit to age 65 and a 30-day waiting period, would pay a monthly premium of about $130 for an adviser-sold product. A 45-year-old would pay $230 a month. Women typically pay more.
MacPhee says all insurers have dropped premiums by between 15 per cent and 20 per cent during the past three years but prices are stabilising.
”Some insurers have increased the length of cover instead of reducing the cost,” he says. ”The biggest innovation in recent years has been the introduction of long-term income protection through to 65.”
Traditionally, income protection paid 75 per cent of salary for a two-year period. Many funds now offer longer benefit periods with 85 per cent or more of salary.
Income protection is sold on either an agreed-value basis, where the benefit level is set when you take out the policy, or an indemnity basis, where the benefit is determined by your gross income in the year before disability – typically 75 per cent of pre-disability income.
Weatherhead says another benefit of holding income protection outside super is the agreed-value option.
”Some super funds offer agreed value but it is quite rare,” he says.
Agreed value is generally preferable for self-employed people as their income can vary significantly. Indemnity cover is most attractive to employees, whose income increases each year.
Before taking out income protection, check whether you are covered if you are unable to work in your chosen profession. Some policies only pay benefits if you are unable to work at all.
Other common exclusions are pregnancy and childbirth, self-inflicted injury, alcohol and drug abuse, AIDS and war-related disabilities. Key points
- Premium payments for income protection held outside super are tax deductible.
- Choice and flexibility have improved across the board.
- The cost of income protection has fallen 15 per cent to 20 per cent in the past three years.
- Income protection purchased inside super costs significantly less than adviser-sold products.
- Check exclusions before selecting a policy.