Life insurance vs income protection insurance

Life insurance and income protection insurance are designed to safeguard your and your family's financial situation in different ways. They offer cover for varying situations, so it's important to understand what each one covers and how you could benefit from having them. 

Considering your individual financial needs is a vital part of the decision-making process.

Understanding the difference

Life insurance

In a nutshell, a life insurance policy is a financial safety net that provides a lump-sum payment to you or your beneficiaries when the insured person dies or is diagnosed with a terminal illness. It's designed so you can have the peace of mind knowing that you have protected your loved ones’ financial future, if the worst was to happen and you are no longer around to support them. It’s intended to cover costs – like the mortgage, and school fees.

Life insurance is also known as life cover or death cover, and the money paid out on a claim can be used for anything you (or your beneficiaries) choose. Life insurance policies vary, but with Real Life Insurance, you can choose a benefit amount that suits your needs, from $100,000 up to $1 million (depending on your age) – it's cover that is designed to provide a lump sum amount for financial support for you and your family, while income protection insurance is designed for monthly payments to cover loss of income due to a sickness or injury that prevents you working, for a specified period of time, covering a portion of loss of wages for an agreed period, such as 6 months, 1 year, 2 years, or 5 years (for example).  

Income protection insurance

Income protection insurance provides financial support to you for lost income if you're unable to work due to being sick or injured. It can help you pay the bills so you can focus on getting better. Income protection insurance is designed to provide your benefit amount to you each month for a period of time, such as 6 months, 1 year, 2 years, or even 5 years, while you are unable to work. If you have a valid policy, you can be paid regular payments of up to 90% for the first 6 months and up to 70% of your current pre-tax income for a given time, depending on the benefit period you choose in your policy. 

Different employment types can be covered – meaning full-time, part-time, and self-employed workers, so long as you meet the weekly minimum working hours – subject to eligibility. Please note, not all types of occupations are eligible. Speak to your insurance provider for advice. 

Do you need both life insurance and income protection insurance?

Everyone is different, and every family has different needs. Whether you need both life insurance and income protection insurance will come down to your circumstances. One thing to note is that both insurance products can often be offered as part of Australian superannuation packages, or may be able to be purchased direct from an insurer or through a broker or employer.  

If you have dependants that rely on your salary and want to protect the family financially, it may be of benefit to consider whether both life insurance and income protection insurance would be worthwhile to have. Income protection insurance could cover lost income for a period of time if you’re unable to work due to sickness or injury, while life insurance pays a lump sum if you pass away or become terminally ill. Both types of insurance serve a different purpose, and both may or may not be of value to you, depending on your circumstances. 

What you should think about when considering income protection insurance

Imagine if you were injured or became sick and were unable to do your job. Who would pay your bills, such as your mortgage, car payments, utilities and other expenses? If you were unable to work for months or even years, this could really affect your quality of life. 

When reviewing your insurance and whether income protection insurance would be of benefit and even how much you may need, you could consider a budget to calculate your current expenses on a monthly basis. 

Creating a budget is a great way to start. This allows you to put a dollar figure to your essentials, and it allows you to estimate your household expenses (including bills and groceries), mortgage or rent, finance repayments (car and credit card), insurance, school fees, debts, and entertainment costs, to assist you to see your monthly expenses and the income you'll need to replace.

Once you have an estimate for all your expenses, consider how much money you'll need to cover healthcare, recovery, and rehabilitation costs if you were to get sick or injured and whether you have any other policies or finances that would assist at such a time. 

Even if you have income protection included with your super, it may still be worth considering whether taking out additional income protection insurance directly is required to cover your expenses. Your super policy may have limitations on the level of cover provided so check whether it is suitable for your individual needs. MoneySmart mentions that some super funds offer default income protection insurance that's usually cheaper than buying it directly from an insurer, but everyone’s needs may vary, depending on the level of cover you need.

Income protection insurance also differs from cover such as total and permanent disability (TPD) life insurance, because TPD is designed to pay out a lump sum benefit amount only in the event you're permanently disabled, and can't ever work again due to illness or injury, or suffer the loss of limbs or sight, or become totally dependent on others, whereas income protection is designed to assist you while you recover from sickness or injury and are unable to work for a period of time.

What are the benefits of life insurance?

Having life insurance can help protect your family, or your loved ones, from the potential financial losses that could result if something happened to you. It can provide financial security to help to pay off debts, pay living expenses and help to pay any medical or final expenses. Consider how your family would manage financially if you were to become terminally ill or pass away. 

How much would it cost to pay off your debt and to continue payments for your children’s living expenses and schooling? Compare these costs to what they may receive from your savings or investments.

When you have life insurance, your loved ones can receive a lump sum payout, which they can use however they choose such as to make mortgage repayments, cover living expenses, or whatever they need to go on without you. These are some of the benefits of life insurance – peace of mind if the worst were to happen. 

Even if you’re without dependants, you could protect your partner and even other family members financially with life insurance. To work out whether you need life insurance and how much you may need, calculate how much money your family would need in a worst-case scenario, and who you wish to list a beneficiary. 

Safeguard your financial security

Income protection insurance and life insurance can assist with protecting you and your family if the unexpected happens. By having income protection insurance in place, you’ll be taking the right steps to help protect yourself financially. Find out more about Real Income Protection Insurance and life insurance.