Debunking myths about income protection insurance

Imagine waking up one day, ready to tackle your usual routine, you head off to work. Then suddenly, you’re struck by an unexpected sickness or injury, and you're left unable to work and earn an income.

How would you manage your mortgage, bills, or everyday expenses if your salary suddenly stopped?

While every scenario is different, income protection insurance can be a financial lifeline in times like this. This type of insurance pays a portion of your pre-tax income if you're ever unable to work due to sickness or injury.

But if you’ve heard any income protection myths — like this type of coverage isn’t necessary if you’re young, fit and healthy — then it’s time to set the record straight. In this article, we’ll be busting those myths wide open, so you’ll know exactly how income protection insurance works.

Myth 1: Income protection insurance isn't tax deductible

Have you heard that income protection insurance premiums aren’t tax deductible? Let’s bust this myth first.

In most cases, income protection insurance premiums are generally tax-deductible, but only if your policy isn't through a superannuation fund.

The purpose of income protection insurance is to safeguard your income, and because of that, you can often claim the premiums as a deduction in your tax return. However, if you have default income protection insurance through your super fund, you may not get the same tax break since those premiums are paid directly from your super contributions and not your post-tax income.

Choosi Tip: It’s important to note that income protection insurance doesn't always cover scenarios like redundancy or job loss for reasons unrelated to sickness or injury. If you’re ever unsure about your specific situation, it’s always a good idea to check the insurer’s policy disclosure statement (PDS).

Myth 2: Income protection insurance isn't necessary if you're young, fit and healthy

If you’re in your 20s or 30s, hitting the gym multiple times a week, and feeling on top of the world, income protection insurance might sound like an unnecessary expense. However, the reality is that no one has a crystal ball that can predict accidents or sicknesses. Even the fittest among us can get injured or face unexpected health issues.

This is where income protection insurance could come in to help you stay on top of your household expenses and allowing you to keep your savings intact if you are suddenly unable to work due to an injury or medical condition.

If you'd like to be prepared for the future, consider getting a policy sooner rather than later as it could mean a lower premium. Some insurers look at factors like age and health when calculating costs, so starting early might help you secure more affordable premiums over the long run.

Myth 3: Income protection insurance through super is enough coverage

You might think that the default income protection insurance via your superannuation fund ticks all the boxes. While it can offer some level of security, it may not always provide the complete solution as it can often come with limitations.

Most super funds have set policy terms, including specific waiting periods and benefit periods. If the waiting period is too long, you might struggle financially while you wait for your income protection payments to kick in. And if the benefit period is short, you could find yourself without financial support if your recovery takes longer than expected.

You might also find that the benefit amount is capped at a level that’s lower than your pre-tax income or benefit periods are limited. And because premiums come out of your super balance, it could reduce your retirement savings over time.

However, as we mentioned earlier it’s important to note that generally income protection insurance premiums can be tax deductible, though not for premiums paid through your superannuation and not your post-tax income.

Myth 4: You don't need income protection insurance if you're covered by workers compensation

Workers compensation is designed to help you if you’re injured on the job. But is that a good enough reason to skip income protection insurance altogether?

According to Safe Work Australia, a large chunk of employee accidents and medical conditions happen off the job. This means workers' compensation won't help if you’re unable to work due to a sports injury, a car accident outside of work, or a long-term health condition like cancer.

Many income protection insurance policies come with extra features such rehabilitation benefits to help cover costs when preparing to return to work and benefits if your disability returns (known as a ‘recurrent disability’). This means you may be able to continue receiving benefit payments without completing the waiting period again — as long as your sickness or injury recurs within a specific period of time (make sure to check the PDS of your insurance policy for more specific details). 

Workers' compensation may not extend as far, so it’s may be beneficial to consider income protection insurance.

Myth 5: Income protection insurance is a waste of money

It’s easy to dismiss income protection insurance as yet another monthly expense that you rarely — if ever — use. However, you should consider the risk of not having a safety net in place, if the unexpected were to happen.

Income protection insurance payments can provide a crucial bridge until you get back on your feet. Whether it’s covering the mortgage, a car loan, grocery bills, or other living costs, a steady monthly benefit can prevent you from dipping into savings or racking up unnecessary debt.

Many insurers have also started to recognise the importance of supporting mental health conditions, although policy terms can vary. Some will offer protection for certain mental health events, possibly with conditions or exclusions attached. If you have pre-existing medical conditions, it’s essential to read the cover details and speak to a financial adviser to find the best option for you and your situation.

Ultimately, income protection insurance can offer peace of mind — something that’s hard to put a price tag on. When you think about the financial and emotional impact of a loss of income, it might turn out to be far from a waste of money.

Keep Reading: Want the answers to your questions about "What does income protection insurance cover?" Learn everything you need to in our benefits of income protection insurance guide.

Whether it’s an accident, an unexpected diagnosis, or a mental health event, an income protection insurance policy can help ease some of the financial strain if you become unable to work. It’s completely understandable to feel overwhelmed by all the options out there, especially if you’re not sure which policy is right for your unique circumstances.

That’s where Choosi can help. Life is unpredictable, and it's important to feel confident in the decisions you make for yourself and your loved ones. If you’re exploring different ways to protect your income, make sure to compare income protection insurance options side by side to help you find a policy that suits your lifestyle, budget, and other specific needs.

It’s about getting clear on your options so you can secure the right cover and focus on what truly matters: living your life without unnecessary stress or worry.