Life insurance vs income protection

If you passed away suddenly or found yourself unable to work due to illness, would your loved ones still be financially secure and be able to continue living the lifestyle they do now? While it’s not a pleasant situation to ponder, this question remains a real and present one for many Australians. If you want to help ensure your family’s financial stability in the event that you are no longer able to provide, then you have a number of insurance options to consider.

Life insurance and income protection can both help to provide for you loved ones in the event that you cannot. They can be purchased directly through an insurance provider or broker, and are generally also offered as part of a superannuation package. So how do they work, what do they cover for, and what can you do if you want more coverage than you already get through super?

What are the differences between life insurance and income protection?

Life insurance and income protection insurance are two distinct financial products that can meet different financial needs, and provide a safety net in different situations. Here’s how they work.

What is life insurance?

Life insurance is a type of insurance that provides a lump sum payment, typically referred to as a benefit, in the event that you die or are diagnosed with a terminal illness. A life insurance payment goes to your beneficiaries, who are people that you nominate – this could be your partner, your children, other family members, and so on.

Generally speaking, when you take out life insurance, you will nominate a benefit amount that you want to be paid out in the event of your death, and the larger the amount you choose, the more expensive your premiums are likely to be. When choosing a benefit, it’s important to consider the expenses that your loved ones might face after your death – for example, school fees or mortgage repayments – and how long you would like them to be looked after. This can help guide the amount of life insurance cover you choose to take out..

What is income protection?

Income protection insurance is intended to provide financial support to you to supplement lost income in the event that you are unable to work due to illness or injury. Generally speaking, income protection insurance will cover you for a set period of time, from six months through to five years, depending on the policy you opt to take out.

It’s important to understand that income protection insurance will not cover your whole salary if you are unable to work – a policy typically covers up to 90% of your income for the first six months, and up to 70% thereafter, until the specified limit of your policy, but these limits can vary. It can be available to full-time, part-time or self-employed workers, subject to eligibility requirements and working hours.

It’s also important to note that income protection insurance may be limited to workers in certain professions.

Do life insurance and income protection come with your super?

According to the Australian Government’s MoneySmart, insurance through super is common in Australia, and most super funds will offer life insurance, total and permanent disability (TPD) insurance and income protection insurance to members. Life and TPD cover are often offered as standard, and some will also offer income protection as standard.

If you’re considering taking out life or income protection insurance, it’s therefore worth checking to see what you are covered for through your super, and if it’s sufficient for your needs. If you feel it’s insufficient for your needs, you may be able to increase your level of cover directly with your super fund.

If you wish to take out more comprehensive life or income protection insurance, then you can purchase a separate policy through an insurance broker or financial advisor, or directly through an insurance company.

Do you need life insurance or income protection?

Ultimately, the decision as to whether to purchase life insurance or income protection will depend on your need and circumstances. Even if you do have life or income protection through super, you might find that the coverage you have there is insufficient, and decide you want to look into taking out additional cover. If you’re pondering this, there are some important questions to consider:

• Do you have dependants who rely on your salary? If your loved ones rely on your salary and would struggle if you were no longer able to earn, then you may consider providing for them through life or income protection.
• How long could you continue to pay bills without your income? If you were unable to work for a period of time, do you have the savings necessary to cover your regular expenses, and for how long?
• Will the cost of premiums be economical? Premiums for life and income protection insurance can be expensive, so it’s worth considering whether the premiums you’ll pay will be worthwhile for the benefit your family will receive.

If you’re considering whether to get life or income protection insurance, then creating a budget can be a worthwhile first step, so you can have an idea of exactly how your incomings and outgoings look. How much do you and your partner (if you have one) earn, and what do you spend per month on mortgage or rent, school fees, utilities, groceries and other miscellaneous costs?

Once you have a picture of your expenses, consider how much coverage you would like your dependants to have in the event that you are suddenly unable to earn an income to provide for them, and whether the amount you’ll pay in premiums is financially sustainable for you, or will outweigh the benefit your family might eventually receive.

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