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Income Protection Insurance vs. Life Insurance: What’s the Difference?
In essence, income protection insurance provides you with monthly, ongoing benefits for the duration outlined by your policy’s waiting and benefit periods. In contrast, life insurance pays your beneficiaries a lump sum benefit in the unfortunate event of your passing or a terminal illness diagnosis.
Let's Compare Income Protection Insurance and Life Insurance
First, let’s break down the intricacies of income protection insurance.
- It replaces a portion of your income, typically up to 70% due to an unforeseen illness or injury that restricts you from working. However, depending on your insurance policy, some may offer up top up coverage of your pre-tax income for the first couple of months of your benefit period.
- While income protection insurance provides regular payments while you recuperate, the benefit period can vary, from a couple of months to several years, or even a specified age.
- Benefit payments can be used to cover essential expenses such as rent, mortgage, utility bills, groceries, car loans, and more over the course of your recovery period.
- Considered beneficial for those managing debt payments, are self-employed, have dependents, or do not qualify for worker’s compensation benefits.
- Premiums are tax deductible at your marginal tax rate, as long as they are not paid through your superannuation.
- Most income protection policies may include rehabilitation support up to 12 times your monthly sum insured.
Now, let’s take a look at the workings of life insurance policies.
- It provides a lump-sum payment to your beneficiaries if you were to pass away or be diagnosed with a terminal illness.
- It is designed to offer financial protection to your loved ones in the event of your demise.
- The payout can be utilised for whatever purpose the beneficiary’s desire.
- It offers peace of mind to your loved ones knowing that they are financially protected if the worst were to happen.
- Policies may also include additional cover options such as Total and Permanent Disability (TPD) cover, critical illness, as well as child cover.
Do You Need Both Income Protection and Life Insurance Policies?
Deciding whether you need either policy or both depends on your individual circumstances and the needs of your family and/or dependents. However, one thing to remember is that most if not all Australian superannuation policies offer insurance products as part of their packages – however this may not be an underwritten policy which may result in a more lengthy or difficult claim process. In any case, external Life insurance policies can be paid from your existing superannuation policy also.
Income protection can sometimes be purchased through your super fund, often at a reduced price. However, premiums paid via superannuation are not tax deductible in your personal name, unlike those for a policy purchased outright. Likewise, policies offered directly via your super fund provider may also have limitations. You should consider if you need additional coverage for yourself and your family.
Both types of insurance have different purposes and may not be valuable to you. To decide if income protection insurance is right for you, start by creating a budget of your needs and essential expenses. For life insurance, consider specific risks related to your health or career, particularly if you have a high-risk job. Determine if your beneficiaries, such as your children or spouse, could cover their living costs in the event of your death.
Most importantly, always remember to check your product disclosure statement (PDS) before investing in either a life or income protection insurance policy. If you require assistance, seek the help of an experienced broker to guide you through available options.
Cyber Liability Insurance is designed to help protect you from claims and support your profitability in the event of a cyber breach or attack.
Public Liability insurance is there to provide protection if someone makes a claim against the insured, the business or its employees.
A business insurance pack can provide cover for your business premises and contents, against loss, damage, theft or financial loss from an insured interruption to the business.
Deciding whether you need either policy or both depends on your individual circumstances and the needs of your family and/or dependents. However, one thing to remember is that most if not all Australian superannuation policies offer insurance products as part of their packages – however this may not be an underwritten policy which may result in a more lengthy or difficult claim process. In any case, external Life insurance policies can be paid from your existing superannuation policy also.
Income protection can sometimes be purchased through your super fund, often at a reduced price. However, premiums paid via superannuation are not tax deductible in your personal name, unlike those for a policy purchased outright. Likewise, policies offered directly via your super fund provider may also have limitations. You should consider if you need additional coverage for yourself and your family.
Both types of insurance have different purposes and may not be valuable to you. To decide if income protection insurance is right for you, start by creating a budget of your needs and essential expenses. For life insurance, consider specific risks related to your health or career, particularly if you have a high-risk job. Determine if your beneficiaries, such as your children or spouse, could cover their living costs in the event of your death.
Most importantly, always remember to check your product disclosure statement (PDS) before investing in either a life or income protection insurance policy. If you require assistance, seek the help of an experienced broker to guide you through available options.
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General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.
All information above has been provided by the author.
All information above has been provided by the author.
Morgan Insurance Brokers, ABN 28 628 815 074, AFSL 327131
This article originally appeared on Income Protection Insurance vs. Life Insurance: What’s the Difference? and has been published here with permission.
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