When first hearing about the idea of income protection insurance, many people wonder how it differs from life insurance. Subsequently, individuals who already have a life insurance policy question whether they also need an income protection policy.
In most cases, the answer to that would be a yes. This is because the primary purpose of taking out life insurance is, in general, to protect your loved ones in the event of your premature death – as they are financially dependent on you. Whereas, conversely, income protection insurance is typically taken out to protect your own ability to earn an income, in the event an illness or injury prevents you from working.
With that in mind, in this post, we look at the difference between income protection and life insurance and whether you really need both types of cover.
Income protection insurance allows you to protect your income if you’re unable to work due to an illness or injury. If you have to claim on your policy, you’ll receive monthly payments based on a percentage of your salary until you’re well enough to return to work or reach the end of your policy’s benefit period – which, depending on the contract, can be when you retire. The proportion of your salary you’ll receive is determined by how much you’re insured for, which can be up to 85% of your income.
Now, in regards to who needs income protection, if you rely on a regular income from your employment, then you would most definitely need to protect it in the event an illness or injury prevented you from returning to work – both in the short and long-term.
Life insurance is a contract that stipulates an insurer will pay a lump sum financial payout to the policyholder’s family in the event of their death. Life insurance cover is designed to ensure your family has a financial safety net and is provided for, if you pass away prematurely.
A term life insurance policy lasts for a limited amount of time, with typical terms being 10, 20, and 30 years. Permanent life insurance cover, on the other hand, lasts for the whole of the policy holder’s life – or until they stop paying their premiums.
When it comes to who needs life insurance, anyone with dependents or loved ones they want to take care of when they pass away will benefit from the peace of mind provided by a life insurance policy.
The main difference between income protection and life insurance is that the former covers you if you’re unable to work while the latter covers you, or rather, your family, in the event of your death. Additionally, while income protection cover is paid monthly, your family will receive a one-time, lump-sum life insurance payment.
On a related note, another key difference between income protection and life insurance is that, generally, the monthly payments you receive when claiming on an income protection policy are taxable. Conversely, your family’s life insurance payout upon your death is tax-free.
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Also, generally, while you must continue paying your life insurance payments until you pass away for your family to receive a payout, you don’t have to pay your premiums while claiming income protection payments.
Income protection and life insurance cover are different products that offer protection for differing circumstances, so you could very much benefit by purchasing each type of insurance policy.
Now, that said, the amount of cover you’ll need and, subsequently, the best types of policy to take out will depend on your personal circumstances. Consequently, it’s best to consult a financial advisor who’ll advise on the best income protection insurance and/or life insurance to suit your particular needs.
See more: Why you need insurance policy review
K Partners are regarded as one of the best financial consultants in Melbourne, offering your tailored advice on income protection, life insurance, or any other aspect of tax or financial planning. Contact us to schedule your consultation.
Please note that all the while the information provided above is factual in nature, it’s also intended to apply generally, and to a broad audience. Subsequently, the information hasn’t taken your personal circumstances or goals into consideration.