How To Calculate Your Income Protection Sum Correctly?

Before you purchase Income Protection Insurance it is imperative that you have adequate information and fully understand all the significant provisions, and carefully consider the cost of premiums and the total insurance you could derive.

Unlike other forms of personal risk insurance, Income Protection premiums are tax deductible for most taxpayers. That means the after tax cost of the cover can therefore be significantly less than the cost of the premium.

For example, if your income protection premium is $100 per month and your annual income is $42,000 p.a. your annual premium after tax will be $70 per month (your income fits into 30% marginal tax rate brackets and you will receive 30% back when you do your tax return).

You can claim the cost of any premiums you paid for insurance against the loss of your income. You must include any payout you received under the policy for loss of your income on your tax return. You cannot claim a deduction for a premium or any part of a premium which you paid under a policy to compensate you for such things as a physical injury.

To calculate for your possible income protection sum, determine what your income was either from:

  • Group certificate,
  • Australian Tax office tax assessment notice,
  • Profit and Loss statement,
  • Employment contract, or
  • Estimate what your earnings will be.

Income Protection Tips & Traps

This isn't a comprehensive list, so please check product disclosure statements and/or consider getting professional financial advice.

  • When taking out income protection policy, ask these main questions - What's covered, what's not covered, how much will I be paid after a claim and what the income protection insurance premiums will cost now and later.
  • Consider getting a policy with index-linked premiums and cover so you know the cover will keep up with inflation.
  • Consider a renewable policy, otherwise companies may reassess your health or other factors on each renewal, possibly raising your premiums or refusing to continue cover.
  • Offset clauses allow most insurers to reduce payouts if you have other income (for example, sick pay from your employer or Centrelink benefits). Check the relevant section of the policy for details.
  • With group insurance provided through Super: the agreement is between the fund trustee and insurer. Make sure both know who your nominated beneficiaries are.
  • Check the waiting period (how long before you receive payment, you can choose from 14 days, 30 days, 90 days, 1 year or 2 years) and the benefit period (for how long payments will be made - typically the normal benefit periods are 2 years, 5 years or to age 65 (your expected retirement age)).
  • Some policies pay out if you're unable to perform your normal occupation; others only pay if you can't perform any occupation for which you're suited by education, training or experience.

Flexible payments let you choose to pay premiums fortnightly, monthly or quarterly, by credit card or direct debit to suit your pay cycle. So give us a call on 1300 793 143 and let one of our trained advisers help you to calculate your income protection sum correctly.

Get your quotes now

What to find out more? Enquire now

Published on January 1-th, 2011 in Income Protection Insurance
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

More on this topic

Enquire about Income Protection Insurance

Important Information

Not all providers in the market are included in the comparison.

Any information or advice contained on this website is general in nature and has been prepared without taking into account your objectives, financial situation or needs.