What is Income Protection Insurance?
Income cover provides a regular benefit to the insured person if they are unable to work due to serious illness or injury. Most income protection policies will generally provide a monthly payment of up to 75% of the insured's income. This amount may include any commissions, bonuses or fringe benefits that the worker is able to receive.
This benefit provides essential financial support to you and your family so that you can keep on top of everyday expenses and short and long term repayments. This may include food, petrol, education fees, credit card debt, mortgage payments and everyday bills. Essentially, this cover enables you to maintain your current standard of living if your ability to work was suddenly taken away from you. This comprehensive guide will discus the benefits of Income Protection Insurance and offer key advice for buyers looking to take out cover.
Who is it for?
Working singles with no dependants People with financial dependants This may include:
When is the Benefit Paid?
|Injury or Illness Benefit is paid to you when you are unable to work due to an illness or injury.|
How is Income Protection Paid?
|A monthly benefit payment of at least 75% of your regular income to cover daily expenses such as:
|The length of time you have to wait until you start receiving your benefit payments, ranging from:
|The time duration of which you would like to receive your benefit, which generally spans from:
What are the key features of Income Protection?
Who is eligible to get Income Protection?
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How is Income Protection Insurance in Australia Different to Life Insurance?
While Life Insurance pays out a lump sum payment in the event of the policy holders death or terminal illness, Income Protection Insurance provides an ongoing benefit, usually in monthly intervals, while the policy holder is unable due to work due to sickness or injury.
Key Differences Between Life Insurance and Income Protection Insurance
|Payment||Provides the insured with a lump sum payment in the event of death or if diagnosed with a terminal illness with less than 12 months to live.||Provides an ongoing benefit (usually monthly) if insured is unable to work due to sickness or injury.|
|Maximum Coverage||There is usually no maximum to the amount of life cover that can be taken out.||Policy holders can generally insure up to 75% of their pre-tax income. Some policies will allow you to receive up to 80%.|
|Policy Expiry||Policy can usually be held till age 99, if the insured dies or if he or she cancel their policy.||Policy can usually be held till age 65. Some policies will allow an extension of cover till the policy holder is 70.|
|Main Purpose||Provide financial benefit to dependents after insured passes away to avoid financial difficulties.||Provide financial benefit to replace the income of the policy holder to support them and their family while unable to work.|
Likelihood of Needing Income Insurance Protection Over Working Life?Its never a pleasant thought to have but the statistics supporting the requirement to have some protective cover in place against injury are quite alarming.
- 75% of working Australians will be forced to take six months or more off work as a result of a long-term medical condition resulting from sickness or accident.
- Of the claims made for Income Cover, less than 50% are a result of an accident. This shows the importance for having cover in place for sickness, the cause of which will rarely stem from the workplace.
Compare Different Types of Australian Income Protection
There are three types of this insurance available in Australia:
Income Protection Insurance
- Policies that are issued by life insurance companies.
- Will provide coverage for up to 75% of policy holders income. Some policies will cover up to 80%.
- Policy cannot be cancelled by the insurer as long as the policy holder continues to pay their premiums.
- Provider is unable to adjust terms of policy once it has been taken out.
- Offers more comprehensive range of benefits and features to other types of income cover.
- Policies usually taken out by employers on behalf of their employees.
- Will offer coverage of up to 75% of employees income.
- Cover provided is usually quite basic. Will not take into consideration unique features relevant to the policy holder.
- This type of cover is usually provided by general insurance companies and provides cover for a range of sicknesses and accidents, usually at a fixed rate.
- The insurance company has the right to cancel the policy or refuse to renew the policy once a claim has been made which can leave the insured in an extremely vulnerable position when the may need protection the most.
- Sickness and Accident Insurance policies are usually renewed annually by the provider to enable them the opportunity to increase the premium in-line with age and changing circumstances.
How is income protection different to bill protection insurance?
While Personal Accident Insurance and Group Salary Continuance may appear as more affordable options, it is essential that you have a clear understanding of what is actually covered under these policies. They will often only offer the minimum level of protection to policy holders and will not take into account their personal needs to the same degree that a standalone Income Protection Policy will.
Can I Get Income Protection Benefit More Than 75% of My Current Income?
In general, most income protection insurance providers will offer to cover your average salary of up to 75% at most. However, you may find other insurers that may offer additional cover in excess of up to 15%.
It is important to note that the additional amount must be used as a superannuation contribution. This means, you will receive the 75% benefit amount and the remainder will be paid into your super fund. Therefore, it is unlikely that you will find insurers who offer to cover 100% of your income, as there should be an incentive for you to return to the workforce once you have recovered.
How is Disability Defined By Income Protection Insurance Providers
To help you determine the type of cover you may need, you'll need to understand the different disabilities which are covered in insurance contracts. You will probably see one of three definitions of disability, so make sure you understand each one before you sign.
Providers will class disabilities as either total or partial and temporary and permanent. The definition of total disablement will vary among insurance providers but most will use the following characteristics to approve a benefit payment:
- An event such a serious accident or illness suffered by the policy holder
- Inability of policy holder to work due to sickness or accident
- Consequent drop in income from policy holder either being unable to work or unable to work at full capacity
Within this definition, Total Disability is then recognised by Australian Insurance providers under three separate types of:
Duties Based Disability
- This is classed as when you are unable to perform one or more important duties in your role at work because of illness or injury.
- These duties could include manual work, supervision, desk work, meeting with clients or presentations.
Income Based Disability
- Is when you have suffered a reduction in your income because of an accident or sickness.
- The amount of reduction will vary from provider to provider
Hours Based Disability
- Means you are unable to perform your work duties for a certain number of hours per week, for example 10 hours per week, because of sickness or an accident.
- In most instances, policy holders will also need to be under the advice and care of a certified medical practitioner in order to make a successful claim for a benefit
Partial disability means that a person is not totally disabled and is able to work for a certain amount of time or in another occupation to which they were trained in.
- Policy holder will in most cases have to have been continuously disabled for the waiting period (totally or partially)
- Policy holder will in most cases have been continuously disabled since the end of the waiting period (totally or partially)
- Policy holder will still need to be under the advice of a medical practitioner at this time
The partial disability benefit is found by using the formula;
It is important to remember that the underlying benefit of this Income Assurance is to provide benefit to the insured if they have suffered a loss in their ability to earn income due to sickness or accident. It is not purely a payment for someone who has suffered a sickness or accident. The reason that only a benefit of 75% is provided is to encourage the insured to return to work.
Video Guide: Find the Best Income Protection Insurance
Agreed Value, Guaranteed Agreed Value, and Indemnity Value Income Protection Insurance
A key factor that must be considered when taking out income cover is whether to take out an agreed value, guaranteed agreed value or an indemnity value income protection policy.
- Agreed value income protection insurance. An agreed value policy means you are insured for the amount of income you are earning at the time of application. To complete your application for an agreed value policy you will need to provide financial documents to your insurer, but you won't need to produce this documentation again if you make a claim. Your monthly benefit amount will then remain the same, regardless of fluctuations in your income over the policy period. This is ideal if you are self employed for example, and are worried about decreasing income levels, or if you are planning to take parental leave.
- Guaranteed agreed value income protection insurance. A guaranteed agreed value policy is a variation of agreed value policy. Under a guaranteed value contract, you will need to provide an up-to-date financial evidence of your income prior to application and the monthly benefits you receive will be guaranteed upfront. No financial documents will be requested at the time of claim to confirm the monthly benefits. It is important to note that this type of contract is only available by select income protection insurance insurers.
- Indemnity value income protection insurance. In this case your income and in turn your benefit amount, are assessed at the time you make a claim. Therefore, when you make a claim you will also need to provide financial documents, so if you income has reduced since you applied for the policy, your benefit will also be reduced, however, if your income has increased, your benefit will too. An indemnity policy can also often be around 20% cheaper in premiums than an agreed value policy, and can be ideal if you are in a steady job, where you receive regular pay raises and bonuses.
How is Income Determined By Insurers
Insurance companies will general provide cover for the 75% of the persons regular income. Regular income is recognised as their total income;
- Fringe Benefits
Some companies will allow applicants to gain cover for regular bonuses as their earned income but the applicant must give evidence that they have been received three years in a row.
Income Protection Policy Waiting Periods
The waiting period is the period between the time you make the claim and are unable to work and the time you receive your benefit payout.
Policy holders can usually choose a waiting period of:
- 14 days
- 30 days
- 60 days
- 90 days
- 1 year
- 2 years
The shorter waiting periods usually correlate to a higher premium, as you are asking the insurer to pay your benefits sooner, however, if you have savings which can help you make ends meet for a few weeks or months, or sick leave you can use, you may want to opt for a longer waiting period to make some savings each month. In other cases, your insurer may also include an accident benefit, where the waiting period is waived if you are unable to work due to an accident.
Typical payment waiting period payment cycle:
|Day One||Claim lodged by policy holder following onset of disability under attention of certified medical practitioner. Policy holder stops work.|
|Day Thirty||Waiting period stops.|
|Day Sixty||First benefit payment given to policy holder.|
Income Protection Benefit Period
When you apply for coverage you will also be able to choose how long you want to receive the benefit payout for. Often you can choose from a benefit period of one, two or five years for example, or you can choose to receive your benefit up to a certain age, such as 60 or 65 years old. Again, the benefit period you choose can affect the cost of your premiums, as the longer the benefit period, the higher the premium.
|Benefit Period||Renewal to Policy Anniversary Preceding Age|
|To Age 60||60|
|To Age 65||65|
|To Age 70||65|
Benefits and Options to Consider During Income Protection Insurance ComparisonStandard Built-In Features Many Policies Will Offer
- Agreed Value: Monthly Benefit is agreed upon at the time of policy application. The benefit payable is based on the insureds income at that time.
- Indemnity: Benefit is paid based on the insureds current income.
- Benefit Indexation: Each year the policy holders sum insured benefit will increase by the increase of the consumer price index to keep pace with inflation.
- Total Disablement Benefit: Benefit paid if insured is unable to work due to sickness or injury as defined by the insurer.
- Partial Disablement Benefit: Benefit paid if insured is unable to work at their full capacity due to sickness or injury as defined by the insurer.
- Waiver of Premium: Premium payments waived if policy holder becomes totally disabled.
- Rehabilitation Expenses Benefit: Benefit paid to reimburse costs associated with the policy holders rehabilitation. This might include an approved rehabilitation program, modification to their home, treatment from an approved medical practitioner.
- Recurrent Disablement: If policy holder returns to work after receiving a disablement payment and suffers the same or a related disablement within a set period, the waiting period will be waived and the claim will be treated as a continuation of the prior claim that was made.
- Terminal Illness Benefit: If policy holder is receiving a benefit, a forward payment of the death payment made to insurer if they are diagnosed with a terminal illness before the expiry date of benefit.
- Death Benefit: A multiple of insured monthly benefit paid to beneficiaries if policy holder dies before the policy expiry date.
- Worldwide Protection: Full cover provided 24 hours a day, anywhere in the world.
- Needlestick Injury Benefit: Benefit paid if policy holder becomes infected with HIV, AIDS, Hepatitis A or Hepatitis C as a result of a splash or needlestick injury that has occurred while performing the normal duties of their occupation. This benefit is normally only offered to medical practitioners.
- Cosmetic or Elective Surgery Benefit: Total Disablement benefit paid if insured becomes totally disabled as a result of cosmetic surgery, other elective surgery or as a result of surgery to transplant an organ from your their body into the body of another person.
Additional Options Often Available on Income Protection Policies
- Specified Injury Benefit: Benefit paid if insured suffers an injury specified by the insurer.
- Bed Confinement Benefit: Proportion of monthly benefit (usually 1/30th) if policy holder is totally disabled and becomes confined to bed and requires the care of a registered nurse.
- Accommodation Benefit: Benefit paid to assist accommodation expenses of an immediate family member if policy holder becomes disabled more than a specified distance from their home and is confined to bed.
- Family Care Benefit: Will pay benefit if policy holder becomes totally disabled and are totally dependent on an immediate family member for everyday needs.
- Overseas Assistance Benefit: Benefit paid to help cover the costs of transporting the insured back to Australia if they are travelling overseas and become totally disabled for more than a specified period of time (usually 3 months).
The benefit and features descriptions shown above should only be viewed as general summaries. There can be great variation from policy to policy in the conditions of when a benefit will and won't be paid. In addition, certain buyers may be unable to add these features to their policy based on their current situation.
How is an Income Protection Insurance Quote Determined?
Premiums are calculated based on the level of cover you require, as well as the perceived level of risk that you carry. Providers will often use the following characteristics of a person to help them determine this:
- Your age, as premiums can increase as you get older, alternatively your cover can decrease as you get older so your premiums remain the same.
- Your gender.
- Your health, any pre-existing conditions and whether you smoke.
- Your occupation and how dangerous it is perceived to be.
- Hobbies such as dirt bike riding or hang-gliding may result in an increase of the premium payable by the insured.
How you structure your policy will also impact on your premium repayments. This will include the additional benefits that you purchase for the policy or whether you have a stepped or level premium repayment structure.
Stepped and Level Income Protection Cover PremiumsWhen you take out a life insurance or income protection policy, you have the option to structure your premium repayments as either stepped or level.
- Stepped premiums- Stepped premiums will often start out being a much lower monthly commitment than level premiums, but they will increase each year you hold your policy, until the policy is cancelled or your benefit expires. Since your premiums are calculated on your level of risk, when you first take out your income protection policy when you are young, fit and healthy, your chances of making a claim are lower, and therefore so are your premiums; as you get older, the premium repayments increase.
- Level premiums- Means you will pay the same premium throughout the life of your policy, outside of cost increases made by your insurer, and cost of living increases. Level premiums start out higher than stepped premiums, but over time, stepped premiums catch up with and often far exceed the cost of level premiums, so level premiums can be the more cost effective option for the long term.
The decision to take out either stepped or level premiums really comes down to the individuals situation. Stepped premiums can be a more affordable option for young buyers without as much disposable income at this stage of life while level premiums may suit buyers who want to know what their premium repayments will be well in advance. The premium structure is a crucial element of the income protection policy and key step for buyers in the comparison process.
Find the Best Income Protection Insurance in Australia for Your Occupation
While there are variables within your control which will affect the cost and coverage of your income protection, such as your budget, your lifestyle and the extras you want and choose to add, there are a number of factors outside your control which determine the type of coverage you have from income protection insurance. You can't change your age or your family's medical history, though you can change your occupation – if you decide to change your career one day.
Your occupation can affect your income protection in a number of ways, for example:
- Your occupational level of risk at application- Your occupation will be assessed at the time you apply for income protection insurance to determine the level of risk you face in your everyday life. For example, someone who works on an oil rig is at higher risk, and will therefore pay higher premiums, than someone who works in an office, or in their own business from home.
- The definition of your inability to work- You take out income protection so that you can be assured that if you're injured or ill and unable to work, you'll continue to receive a portion of your income. However, the definition of your inability to work differs between policies and providers.
- Your ability to work in any occupation- On the other hand however, some income protection policies will not continue paying a benefit if you can return to any work. Therefore, if you are the injured carpenter who can't return to your own occupation, but you can get a desk job, you will be expected to take any job you can, and your benefit will not continue.
- The demands of your occupation- Whether you take out income protection insurance which covers you for returning to your own occupation, or being able to return to any work, depends on your current occupation. For example, while someone with a manual job may be able to return to work in any occupation behind a desk, if you currently work in an office job and you are injured so significantly that you can't carry on your own occupation, there is little chance of finding any other occupation you will be able to do either.
Income Protection and WorkCover
Do I Still Need Coverage if I have WorkCover?
Workcover is a nationwide initiative where all employers pay the government a premium in case one of their employees is injured at work. The employer can then make a claim and Workcover will payout compensation and other benefits – but only if the injury occurred at work.
WorkCover should only be viewed as a minimum insurance cover.
While all Australian employees are covered under Workcover, that doesn't make income protection insurance obsolete. Workcover should only be viewed as a minimum insurance cover, as potential benefits are not always guaranteed as Workcover covers:
- Accidents or injuries which occur at work
- A lump sum payment or regular repayments, with the power to withhold payments until the level of your disability is determined
- You may not receive payment benefits when you are first injured which can be when you need them the most to cover medical bills, mortgage repayments and other immediate expenses
Can I Get Income Protection If I Got fired, Made Redundant or Retrenched?
Income protection insurance in Australia is designed to provide monthly benefit payment only if you have a temporary disability and are unable to work. It will not cover you if you are made redundant or involuntarily unemployed due to maternity/paternity leave or sabbatical leave.
Some Australian insurance providers may offer additional policy features that are designed to provide financial assistance should you be retrenched, primarily in forms of a premium waiver and/or loan repayment cover (with the associated financial institution). However, be sure to read the terms and conditions as they will vary between providers.
What are the Features of Income Protection that offer cover for Redundancy?
Income Protection Through Your Super
Superannuation funds have provided additional life insurance cover to members for many years and can be an affordable option for members. However, it is important to remember that income protection insurance through superannuation will often only offer the minimum level of coverage to the policy holder and will not allow much room to tailor the policy towards their specific needs.
It is crucial for buyers to understand both disadvantages and advantages of income protection through superannuation when considering this option.
Disadvantages of Income Protection Through Superannuation
- Complex claims process: If you need to make a claim on your income protection insurance which is held through your super, you not only need to satisfy the insurer of the legitimacy of your claim, but also the trustee of your super fund. This is because you are not paid the benefit directly, instead the insurance benefit amount is paid to the trustee and you then have to meet a condition of release to receive the funds.
- Premiums are not tax deductible: In comparison to income protection outside of superannuation, premiums for income protection inside of superannuation are not tax-deductible.
- Limited range of benefits and options: These policies may only include the bare benefits to policy holders, leaving them unprotected under certain events.
- Cessation of work: To make a successful claim you will also need to meet the definition of temporary incapacity, which means you must be unable to work. Therefore, you are unlikely to be able to make a successfully claim if you are suffering from a partial disability.
- Continue private cover: If you choose to change super funds for any reason, you will need to check whether you can continue your policy in a private capacity. You will want to continue with your insurance cover, because if you have to reapply, you will be older and may be considered a higher risk, and will therefore have to pay higher premiums.
- Your retirement can be funding your insurance: It may seem cost effective to pay for your income security through your super fund, because you don't miss the premiums coming out of your income. However, the premiums can be coming out of your income insurance, as some super funds will use your retirement funds to pay your insurance premiums. Therefore, you are protected in your working life, but your nest egg for retirement is being reduced without you even realising. Making the minimum contributions to super isn't enough for most people to fund the kind of life they want in retirement anyway, so imagine how much your lifestyle is going to be reduced when not even nine percent is being contributed.
Of course there are some important benefits to consider when looking at the option of income protection through your super:
- Greater security at claims time: When you make an insurance claim it can feel like you're one tiny individual against a giant company, however, when you make a claim through your super, you are backed by the superannuation fund acting on your behalf.
- Income insurance can be more affordable through super: When your super fund protects you with income insurance, it is doing so through a group policy. This means that because they are accessing wholesale rates, the insurance is cheaper because you are not assessed on your individual circumstances and risk factors.
- Automatic acceptance: As a group policy, you are not required to answer any questions or take a medical exam. Even if you are a smoker you will pay the same rate as a non smoker. Under automatic acceptance you can be insured for as much as $20,000 a month.
- You don't pay for your income protection insurance up front: When you have cover through your super, the premiums are paid from your retirement funds, so you don't have any costs to cover now.
- Assessed as group insurance: Income protection through your super is also not usually assessed on your individual circumstances, and is more like group insurance, where the members of the super fund are assessed as a whole. This can also mean that when it comes time to make a claim, you have the full might of a large superannuation fund behind you for support.
- Unrestricted occupations: If you work in a particularly dangerous job, you may find that some insurers won't want to cover you, however, with the group cover through your superannuation, there is no restriction on occupations.
- You may not have cover anyway: While income protection insurance through your super fund does come with some restrictions, very few Australians have any sort of income protection anyway. Therefore, being covered through your super gives you protection without you having to even think, remember or research it. This can be of particular advantage to young singles or couples, who don't bother with income protection insurance because they think they are invincible and they don't have dependents anyway. However, you are forgetting that your biggest asset is your ability to earn an income, and that should be protected.
- Cost effective premium payments: When you pay for your income insurance through your super you are doing so with your contributions which have been taxed at the super contribution rate of 15 percent. However, if you take out a separate policy and pay for the premiums with your post tax earnings, you could have been taxed at a rate as high as 45 percent.
It is important to note that each super income protection policy is different and the range of benefits and features may vary greatly policy to policy. Consider your personal situation when deciding if this type of policy is the right for you or whether you may require a more comprehensive income protection policy outside your super.Read more on income protection and superannuation
Income Protection Insurance for Women
Unfortunately, Australian women form a huge percentage of Australia's population that are severely underinsured. With an ongoing rise of women in the Australian workforce, it is just as crucial for women as it is for men to consider if they should take out income cover.
Traditionally income protection was not a benefit which was on the radar for many women, but whether you work inside or outside of the home, full time or part time, income protection is in fact a must have for women in most cases. For example, women can benefit from income protection insurance in the following ways:
- Peace of mind- As a woman it is in your nature to worry, organise and control your own life and try and manage your home and the lives of your family. Therefore, since you already have a lot going on, not having to worry about how you would look after your family if you are unable to work will be a welcome relief. For example, if you're a mum you know you don't have time to get sick, not if there are family members relying on your to bring them pain killers, soup and cups of tea, and the same goes for protecting your income, because your family rely on your ability to work more than you may realise.
- Independence and flexibility- If you have worked hard to forge a career for yourself, then you have done so by being strong, dedicated and independent, but if you were unable to work because of illness or injury, you would be at risk of losing that independence. With income protection insurance you can receive a benefit of up to 75% of your regular income to help you remain in control of your finances and your life, and give you the flexibility and freedom to recover at your own rate without diminishing your savings.
- Pregnancy premium waiver- Income protection insurance can also be catered specifically for women, and include benefits such as a pregnancy premium waiver. This means you won't have to pay your premiums for up to six months while you are pregnant, or on maternity leave.
- Cover for part time work- Even if you're not the main income earner in your household and you work part time, you can still take out income protection insurance. Each insurer will have their own minimum requirements, for example, you may have to work a minimum number of hours or days per week to qualify.
- Agreed value- An agreed value policy can particularly benefit women who are planning to have children, as the benefit amount is assessed at the time of your application, and is not dependent on your income at the time you claim, when your income may have decreased after re-entering the workforce, perhaps part time, after having children.
Tips to Compare the Best Income Protection Insurance in Australia
Protecting your income is a serious business and you want to make sure the policy you are paying for is going to protect you in the way you need. Therefore, make sure you ask your insurer a few key questions when comparing policies, such as:
- What is and isn't covered?
- How much will be paid after a claim?
- Exactly how much will the premiums be now?
- Will the premiums go up in the future, and by how much?
- Are the premiums indexed linked? i.e. will they keep pace with inflation?
- What waiting periods are offered?
- What benefit periods are offered?
- Is a benefit paid to your dependents if you pass away?
What does the Best Income Protection Insurance Cover?
More often than not, there is no simple formula to determine what sort of coverage, features and benefits that the best income protection insurance provides. Remember that income protection insurance is a type of protective insurance that you can tailor to match your situation and needs, allowing you to obtain maximum benefits shall you need to claim in the future. The type of coverage, features and benefits that you have chosen according to your needs will be the best income protection insurance cover as they are tailored to your requirements.
What is Considered to be Your Insurable Monthly Earnings Under Income Protection Insurance?
The monthly income that you can insure under income protection insurance will consist of a number of different components and often these will vary between insurance providers. Your insurable monthly income is the earnings that you get every month from your primary occupation and by your own personal efforts. It is important to read through the PDS or check with your insurance provider if you have any doubts on which parts of your earnings are considered to be insurable. Your total remuneration package often include:
- Regular commissions
- Regular bonuses
- Fringe benefits
- Payments for overtime, and
- Superannuation contributions
Insurable monthly income does not include:
- All types of income that you will continue to earn even if you are unable to work
- Other unearned income, such as dividends, interest, rental income, or proceeds from sale of assets
- Income from your other occupations, other than your main occupation
- Ongoing trailing commission or royalties
Can You Apply for Income Protection Insurance if You are Already Ill or Injured?
In the event of which you have become ill or injured and are unable to work and earn your income, you will not be able to obtain income protection insurance to cover you for the current situation. However, you can still apply for income protection insurance for future events.
Since your health is taken into consideration when you apply for income protection insurance, you may find that your current illness or injury may become a pre-existing condition. This means that you may have to pay higher premiums for your coverage, although this can depend on the nature of your condition or the type and level of injury.
What to Look Out For: Tips and Traps when Comparing Income Protection Policies
As you can see, there is a lot to consider when taking out income protection insurance, and following are a few simple tips to help you navigate your options, as well as a heads up on a few common traps to watch out for:
- Ask for all the details- Don't be afraid to ask question after question of your insurer until you're sure you've got all the information. This means knowing exactly what is and isn't covered, how much your benefit amount will be, and what your premiums will be now and into the future.
- Keep up with inflation- You can look for a policy which has index linked premiums and benefits, so that you know that your benefit amount will always keep up with inflation costs.
- Look for a non-cancellable policy- A non-cancellable policy means that your insurer won't reassess your health or circumstances each time you renew your policy, so you won't be refused cover or have a premium loading added. You can also take out a policy with guaranteed future insurability so that you can increase your level of cover without your application needing to go back to the underwriter.
- The affects of other income- Be aware that offset clauses can allow your insurer to reduce your benefit payout if you are receiving income from another source, such as sick pay from an employer or Centrelink benefits. Know the conditions of insurance through your super. When you take out income protection insurance through your super, the policy is between the trustee of the fund and the insurer. Therefore, you need to make sure that both the trustee and the insurer know who your nominated beneficiaries are so the benefits go where they are needed.
- Make sure you're happy with the waiting period and benefit period- The waiting period is the time you have to wait before you receive your benefit payout after a successful claim. The waiting period you choose will depend on how much you have in savings, and how long you can survive financially on other benefits such as sick leave. The benefit period is the length of time you receive the benefit for, whether it is for two months, two years or until retirement.
- Own occupation or any occupation- Make sure you know whether you will be expected to return to any job you are able to perform after an illness or injury, or if you can continue to receive a benefit until you are able to return to your own occupation.
- Understand the terms and conditions- As boring and time consuming as it is to read the fine print of an insurance policy, you want to make sure you understand all of the terms, inclusions, exclusions and conditions of your policy, so that you know you have the coverage you want and need. You don't want to be paying premiums for a policy, only to find out at the time of a claim that you're not eligible for benefits.
Income Protection Insurance: Frequently Asked Questions
What is Income Protection Insurance?
- The insurer pays you a portion of your salary while you are unable to work due to illness or injury.
How much will I get?
- Policies will usually pay out up to 75% of your regular gross income.
Is it tax-deductible?
- For an individual, Income protection insurance is tax deductible and the benefits when paid are considered taxable income.
When will I get paid?
- Waiting periods (The time you must be unable to work before you start receiving payout income) range from 14 days to two years, the shorter the waiting period, the higher the premium. The cause of your sickness or injury does not need to be work-related.
Does my age affect the premium I have to pay?
- Generally speaking, the older you are, the more likely you are to suffer illness, therefore the premium you pay will be higher; smoking is also seen as an added level of risk and usually sees your premium rise.
What is the difference between stepped and level premiums?
- A stepped premium is one which starts out as very affordable, and increases each year as you get older, while a level premium stays the same though out your policy, only increasing to keep in line with inflation.
Are there any exclusions on Income Protection policies?
- While most policies will not provide cover for childbirth multiple pregnancy, threatened miscarriage, normal and uncomplicated pregnancy and participating in an IVF or similar program are all excluded.
Will my occupation affect how much I have to pay for a policy?
- Premiums can be based on the type of occupation the person has and the perceived level of risk. A manual or blue-collar worker such as a miner might be required to pay a higher premium compared to an office worker, who is considered less risky.
What is the difference between high risk and standard risk cover?
- All insurance approvals and premiums are assessed based on your level of risk, and the higher your risk level, the more you have to pay in premiums, and in some cases the harder it can be to secure cover. Being classified as a standard risk means you have a low risk job, lifestyle and health factors, whereas high risk cover can be more expensive for people with riskier jobs and leisure activities.
What is a benefit period?
- The maximum length of time your policy will pay your income if you are unable to work. Typical benefit periods are two years, five years or 'to age 65', and the longer the benefit period, the higher the premium.
How do income protection insurers define disability?
- Each insurer will have their own specific definition, but in most cases you can be classified with a duties based disability where you are unable to perform the core tasks of your job, income based disability where your income is reduced because of you disability, or hours based disability where the hours you are able to work are reduced because of your disability.
What is the minimum working hours required to receive cover?
- This is a condition set by each insurer, requiring that you work a certain number of hours each week to be eligible for cover.