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Pros and cons of income protection insurance

Income protection will provide cover if you have to take time off work because of illness or injury  16000646 800520150 0 0 14089721 300

Income protection could you give you a fallback option in case you have to take a few months, or longer, off work unexpectedly because of illness or injury.

Also known as salary continuance, it means you could still manage your expenses and debts during this period, after you have used up all your sick pay.

Generally, most income protection insurance will cover you for up to 75 per cent of your regular income until you return to work.

There are both pros and cons to this type of insurance, as well as things to bear in mind if you do decide to purchase it.

Pros

Less stress

If something did go wrong and you had to take some time off work, you could focus on getting better, rather than worrying about paying your day-to-day expenses.

It can give you peace of mind that your family will be provided for even if you couldn't go to work.

Can help you in the short-term

You can change the duration of your cover, so if you are worried you wouldn't be able to pay off your current debts, it might be a better choice to opt for a shorter term payout period.

Once your debts are paid off, you may not be as concerned as you may be able handle your obligations without a helping hand, even if you did lose your main source of income.

Protection in the long run

If you think you may need more long term coverage, you could choose to take out a five year payout period.

This means you would receive payments for five years if you were unable to work, so you wouldn't need to worry about how your family would support themselves if you found yourself out of action.

Small business owners

If you run your own company, income protection insurance may be a great investment, as your business can be put at risk by an unexpected illness or injury preventing you from working.

Cons

Pre-existing medical condition

If you have a health condition you have to declare, this may affect the amount you have to pay on your premiums if there is a chance it could result in time off work.

Other factors that could impact the amount you need to pay include your gender and occupational risks.

If you work in a high risk occupation or environment, chances are you will need to pay more as you are statistically more likely to need a payout.

Smoking is another activity that may increase your premiums as it is linked to increased risk of other illnesses.

Waiting period

Most income protection insurance policies have a waiting period, so you may have to rely on sick pay until the waiting period is over.

This could be around 60 - 90 days. Income protection is designed to bridge the gap between pay days, so it takes into account sick leave, because if you are receiving payments from your employer you should not need additional assistance. However, once you run out of sick days, you do not want to be left high and dry.

Things to keep in mind

Exclusions

Different policies may have certain activities excluded, so it might pay to read the fine print as you might not be covered if you are injured or disabled during certain activities.

However, these policies will cover you if you are injured outside of work, providing it was not the result of undertaking a restricted activity.

The insurer may also not pay you if you have injured yourself on purpose or if you were hurt during war, riots or terrorism. If you were involved in illegal activities or were using drugs or alcohol, you may also not be covered.

Tax

If you did require a payout, be aware that you would need to declare this amount on your tax return.

Superannuation

You may be able to purchase this type of insurance under your self-managed superannuation fund (SMSF).

The insurance can be purchased as part of the fund's premium and you may be able to benefit from a lower tax rate if you purchase it this way.

The tax paid within an SMSF is around 15 per cent, which is generally lower than an individual marginal tax rate . This means you will be saving money for the same product.

Stepped or level premiums

Income protection insurance can be either stepped or level, so make sure you're aware of the type of policy you have signed up for.

A stepped premium might be cheaper at the beginning and slowly increase, while a level premium may not change as you get older.

This means a level premium will be more expensive than a stepped one at the start of the policy's life, but the amount you pay will not change too much over time, which could save you money.

Change of income or needs

Whenever your income level changes, you will need to adjust your level of cover to make sure it is up to date.

If you acquire more debt, such as a mortgage, you may also want to adjust your level of cover so all your debt repayments would be covered if you needed to make a claim.