What is Disability Income Insurance?
Disability income insurance, also known as income protection insurance, is a protective cover that provides a replacement income when you are unable to work as a result of an illness or injury. With most disability income insurance policies, you can insure and receive monthly benefit payments of up to a maximum of 75% of your average salary. This benefit can be used to cover your daily living expenses, such as food, shelter (rent or mortgage repayments), utilities, bills, and debts.
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Some disability income insurance providers may allow cover for an additional 15% on top of the maximum amount insured; however, this additional amount must be used as contribution to your super fund.
Why does it only cover 75% of your salary?
Disability income insurance only covers 75% (and not 100%) of your salary, as there should be an incentive for you to return to full-time employment when you have returned to full health. It is also considered as a sufficient amount to cover the basic necessities while you are still recovering.
- What is Considered as Insurable Income under a Disability Income Cover?
- But I have Workers Compensation Cover, Will Disability Income Insurance Still be Necessary?
- What about DisabilityCare? Isn't it Similar to Disability Income Insurance Scheme?
- Various Types of Disability Income Insurance
- Disability Income Cover Plans by General Insurers
- Understanding the Definition of Disability as Outlined by Income Cover Providers
- Important Components of a Disability Income Insurance Policy
- How much does Disability Income Cover Cost?
- Handy Tips on Comparing Disability Income Insurance Plans
- Applying for Disability Income Insurance
What is Considered as Insurable Income under a Disability Income Cover?
The definition of insurable income is generally quite similar across insurance providers, however it always is important to read the Product Disclosure Statement (PDS) so you are aware of what does and does not constitute as insurable income in the policy. There may also be some notable differences on what is considered to be insurable income between employees and those who are self-employed.
|Insurable income is the total remuneration package before tax paid by your employer, using your own personal efforts.||Insurable income is the total income earned pre-tax by the business or practice, by own personal exertion or activities, less their share of necessary business expenses incurred.|
This includes (but not limited to):
This includes (but not limited to):
Learn more about Income Cover for Self-Employed Workers
But I have Workers Compensation Cover, Will Disability Income Insurance Still be Necessary?
WorkCover is a worker's compensation scheme in Australia that is designed to protect workers in the event of workplace injuries, while in the course of their employment. Worker's entitlements will tend to vary between states as WorkCover is administered by each of the state and territory governments.
When budget cuts were announced, alongside with changes to the legislation in 2012, tighter restrictions and definitions were placed on the WorkCover scheme. Thus, making it much harder for injured workers to access WorkCover payouts, and even if they do, the amount of time and monetary value of cover is quite limited and varies between states.
Some of the changes to WorkCover that affect workers in NSW include:
- Weekly benefits paid to an injured worker will be reduced to 95 % of your weekly income for the first 13 weeks, and further reduced to 80% for the following consecutive weeks;
- One year cap is applicable on the payment of medical benefits;
- Serious medical conditions are no longer covered, unless the worker is able to prove that the nature of their occupation has contributed to the condition;
- Changes to journey-based claims, in which injury sustained while commuting to and from work is no longer covered;
- No benefit is payable for nervous shock claims of family members of the injured or sick workers.
- Pain and suffering claims are no longer covered.
WorkCover is an important form of cover for all Australian workers; however, it should only be viewed as minimum insurance cover. WorkCover only provides coverage for incidents that occur within a workplace environment and the compensation payout is not always guaranteed due to strict criteria and rules to adhere to. It often takes a long time to determine the validity of the claims and payments can be withheld until your level of disability has been assessed.
Income protection can provide you with comprehensive coverage in the event of a debilitating illness or injury, whether it occurred at or outside of work. Upon a successful claim, once your waiting period has elapsed, you will start receiving your benefit payments that you can use to cover immediate needs, so that you can recover without having to worry about your finances.
Disability Income Insurance, Trauma Cover and TPD Cover
|Disability Income Cover||Trauma Cover||TPD Cover|
|Provides a monthly benefit of up to 75% of your income, if you are totally and temporarily disabled as a result of an illness or injury, has rendered your ability to perform the usual tasks of your occupation. Benefit is payable once the nominated waiting period has expired.||Provides a lump sum benefit when you have been diagnosed with a medical event as specified in your trauma policy. Benefit is payable once the survival period has elapsed.||Provides a lump sum payment in the event that you are totally and permanently disabled, and it is unlikely that you are returning to work ever again.|
What about DisabilityCare? Isn't it Similar to Disability Income Insurance Scheme?
DisabilityCare and disability income insurance are two very different protection schemes. DisabilityCare is the Australian Government's initiative for a newly improved disability support system for the nation. With this scheme, the Government is committed to provide high quality care and support to people with disability, their families and carers, as well as improving their quality of life. However, it does not cover your daily living expenses or replace your lost income if you are no longer able to work as a result of your disability. It also only covers individuals with significant and ongoing disability.
DisabilityCare is scheduled for a complete rollout by July 2019 and to date, it is still in the initial stages of development. Until then, many people with disability may have to rely on the current disability support pensions. There are more than 700,000 Australians that receive disability support pensions in Australia and many must survive on the benefit that amounts to less than $15,000 per year (Scott, 2009).
Disability income insurance, on the other hand, offers financial assistance to replace any lost income as result of your disability and maintain your standard of living. You can use the monthly benefit payments to cover your daily living expenses and other immediate needs that you and your may have while you are taking time off work. Having this protection in place means that you won't have to rely on your savings once your sick leave has finished, and you can focus on your recovery.Read more on How National Disability Insurance Scheme (NDIS)
Various Types of Disability Income Insurance
There are different types of income insurance that are designed to provide financial relief in the event of a debilitating illness or injury. While the benefits and features may sound quite similar, there are some notable differences between these policies that you should be aware of:
- Is also known as disability income insurance or income replacement insurance.
- Available for purchase through retail life insurance providers.
- Guarantees coverage on your monthly income of up to 75%.
- Excess cover of up to 15% is often available from select providers, which must be used as your superannuation contribution.
- You can tailor your policy to meet your individual needs, with features and benefits that you can add to assist you in your transition back to work.
- Can be tailored to meet the specific needs of your occupation, for example needlestick cover for workers in the medical occupation.
- Guaranteed renewable policy provided that the premiums are paid on time.
Group Salary Continuance Insurance
- Is a type of income protection cover available through super.
- Also covers up to 75% of your average monthly income.
- Taken out by employers on behalf of their employees, although you are also able to apply for individual cover through your own choice of super fund.
- Cover is cost-effective as it is purchased in bulk by the employer to access discounted rates and premium payments are deducted from your super.
- Access to cheap cover for smokers and individuals with poor health.
- Basic coverage, with minimal offerings on features and benefits that may be relevant to your specific needs and circumstances.
- Usually has a maximum benefit period of two and five years, although this varies between super funds.
Personal Accident Insurance
- Provides coverage for serious injuries sustained from an accident.
- Benefit is payable in the form of a lump sum or monthly payments to cover up to 75% of your average income.
- Does not cover accidental death, although it may be offered by select providers as an additional benefit.
- Automatic acceptance, as no medical exam or blood tests are required to apply.
- More affordable to the comprehensive income protection insurance options.
- Cover is accessible by individuals who are doing voluntary work.
Disability Income Cover Plans by General Insurers
There are other types of income cover policies available in the market, issued by general insurers. It is important to note that income cover plans by general insurance companies, while similar in nature, have different characteristics to disability income insurance policies and are often more suitable to cover short-term needs.
Sickness and Accident Insurance
- Provides coverage for a range of illness and injuries.
- Benefit is available for a fixed dollar amount.
- Policies are issued on an annually renewable basis, which means the policy can be cancelled at any time.
- If a claim has been made, the insurer may choose to cancel or refuse to renew the policy.
- More suitable as short-term disability cover.
Bill Protection Insurance
- Provides coverage in the event of a serious illness, injury or involuntary unemployment.
- Benefit payments are designed to cover your financial obligations, while you are still recovering or looking for new employment.
- Only offered by a limited number of general insurance providers.
- Limited benefit amount to choose from.
- Cover is available for workers that have been made redundant, for a maximum of 3 months and certain conditions may apply.
- You are not required to undertake any medical examination or blood tests.
- More suitable as short-term disability cover.
Understanding the Definition of Disability as Outlined by Income Cover Providers
As with other life insurance policies, disability is defined differently, whether they are total or partial, and temporary or permanent. With disability income cover, it is essential to have a clear understanding on the definitions of total and partial disability, as they will determine whether your benefit is payable or not.
Total Disability Definition
Under a disability income insurance contract, a total disability generally has the following characteristics, although they may vary between providers:
- An event that occurred as a result of a serious illness or injury;
- Loss of ability to work within a normal capacity caused by the illness or injury;
- A decrease in income as a result of inability to work or only able to work with reduced hours because of the illness or injury.
Total disability is then defined much further to describe the results of an event, which is broken down into three main categories:
|Duties Based Disability||Income Based Disability||Hours Based Disability|
|You are unable to complete one or more key tasks that are required as part of your own occupation at work as a result of your illness or injury.||
You are suffering from a reduction on your usual salary as a result of your illness or injury.
The number of percentage of reduction in income will vary between providers.
|You are only able to perform your work duties at reduced hours per week, due to your illness or injury.|
Partial Disability Definition
Under the partial disability definition, an individual is entitled to a benefit payment even if he/she is not totally disabled and is able to work at reduced hours or in another position that they are suited for by training.
In order to receive a partial benefit payment, you must be:
- Totally disabled throughout the nominated waiting period prior to receiving your first benefit payment.
- Either totally or partially disabled when your first benefit payment has commenced.
- Under doctor's supervision, until a confirmation is made on your disability to be either total or partial.
- Once confirmed, your total benefit payment will cease and you will receive partial disability benefit, which will be calculated based on the following formula:
Important Components of a Disability Income Insurance Policy
Disability income insurance is cover that you can tailor to match your needs. There are a number of different components in the policy that you may wish to consider carefully as they have an impact your benefit payments. These include:
- Waiting Period: is the amount of time that you have to go through until your first benefit payment starts. Choosing the right waiting period is essential as you have to take into account paid sick leave that may be available from your employer, and whether or not you are financially capable to cover your monthly expenses for the duration. You can choose a waiting period of 14, 30, 60, 90 days, 1, and 2 years and the benefits will be paid in arrears from when the period ends.
- Benefit Period: is the length of time you would like to be covered for with the benefit payments. In deciding the appropriate benefit period to suit your needs, consider your current financial situation and whether your savings will be sufficient to cover your financial commitments while you are disabled and unable to generate an income, particularly for an extended period of time. Benefit periods that are generally offered across most disability income cover include 2, 5 years, up to age 65.
- Indemnity and Agreed Value Policy Structure: The policy structure you have chosen will determine the benefit amount you will receive at the time of claim. With an indemnity value policy, your benefit amount will be calculated based on your income at the time of claim. This type of policy structure is suitable for workers that have relatively stable income. On the other hand, agreed value policy is based on your income at the time of application, so even if your income fluctuates over the life of your policy, you will still be receiving the same amount that is agreed upon.
Main Features and Benefits of Disability Income Cover
Built-in Features that are Generally Offered by Many Disability Income Plans
- Total disability benefit: Benefits are payable in the event that you are unable to work at all as a result of a disability for longer than the waiting period.
- Partial disability benefit: If you can only work in a reduced capacity, you will still be entitled for a benefit payment based on the reduction in your income.
- Recurrent disability benefit: You may not need to go through the waiting period again if you are suffering from a relapse of a similar illness that triggered the previous claim.
- Rehabilitation benefit: Your rehabilitation expenses may be reimbursed for up to 12 months if you are suffering from a total disability, which will be paid on top of any other benefit payable.
- Needlestick injury benefit: provides coverage for medical professionals and other professions that are at risk of blood borne infection. If you are acquired HIV, Hepatitis B or C while at work, you will be entitled to a benefit payment.
- Elective surgery benefit: You are entitled to a benefit payment in the event of a total disability as a result of cosmetic surgery, other elective surgery or surgery for the purpose of organ transplant.
- Premium waiver while on claim: You won't have to pay any premiums while you are receiving your monthly benefit payments due to a total disability.
- Interim accident cover: While your application for disability income insurance is being processed, you will be automatically covered for accidental injury or death.
- Indexation: Your monthly benefit will be automatically increased each year to keep up with inflation.
- Guaranteed future insurability: You can increase your monthly benefit payment when your salary package has increased, without having to provide further medical evidence.
- Worldwide protection: You have access to your disability income cover no matter where you are in the world, 24 hours 7 days a week.
Features and Options that are Available for Additional Costs
- Death benefit: With this benefit, a lump sum benefit is payable in the event of your death.
- Crisis benefit: If you suffer from a serious medical condition as specified in your disability income insurance policy, you will be entitled to a lump sum benefit payment.
- Specific injuries benefit: If you suffer from a condition that is specified in your policy as a result of an injury, you will receive your monthly benefit payments for a specified period.
- Family care benefit: If as a result of your illness or injury, you are totally dependent on a family member for daily essential needs, a benefit will be payable to cover the lost income for a specified amount of time.
- Home care benefit: If you are totally disabled, confined to or near a bed and require the help of a professional housekeeper, a benefit will be payable.
- Superannuation contribution option: With this option, you get to continue your superannuation contribution even when you are totally or partially disabled.
- Unemployment benefit: Some insurance providers may offer a benefit payment to cover your loan repayments or waive your insurance premiums when you have been made redundant for up to three months.
- Overseas transport benefit: In the event that you have been totally disabled for at least 12 months while outside Australia, your insurer will reimburse the cost of your airfare to return home.
- Accommodation benefit: A benefit will be payable to cover the costs of accommodation for a family member that needs to be with you while receiving care.
Standalone Cover or Linked Disability Income Insurance?
You have the option to link your existing disability income cover with total and permanent disability insurance, known as TPD rider. It allows additional protection that may be required should you be significantly disabled and are unlikely to return to work ever again. You will receive a lump sum benefit payment instead of the monthly payments, which you can use to cover immediate payments on items such as medicals, rehabilitation, nursing care, equipments, home and vehicle modifications.
In Australia, there are only select providers that offer TPD rider with their disability income insurance products. These include:
Depending on your personal circumstances, you may choose to have a standalone TPD policy in addition to your existing disability income insurance. While you may be paying double in premiums, a certain disability may prompt a claim on both disability income and TPD insurance policy. When a TPD insurance claim is successful, it will generally also lead to a successful disability income insurance claim, when both are held by a policyholder.
Whether it is held separately or linked with disability income insurance, TPD cover is beneficial to provide cover in the event of permanent absence from work due to a significant disability. The two policies can work together to replace 100% of your income.
The lump sum from TPD cover can be used to meet any immediate expenses related to your condition, settle outstanding debts and cover your children's future education expenses. While disability income cover can work as a replacement for your income, when you are no longer able to work, so you are able to maintain your family's standard of living and meet the daily household expenses.
How much does Disability Income Cover Cost?
There are a number of different factors that determine the cost of disability income insurance, such as:
- Age: Generally, the older you are, the higher your premiums will be, to cover for increased health risks that are usually present in later stages of life.
- Gender: Women pay higher premiums for disability income insurance compared to men.
- Health: Your current health condition and whether or not you have a pre-existing medical condition will influence the premiums you pay.
- Lifestyle choices: Smoking and excessive drinking habits will increase your premium rates.
- Occupation: Workers in high risk occupations will generally pay higher premiums compared to those who work in low risk environments.
- Pastimes: If you participate in activities or hobbies that are particularly risky, your application for cover may be rejected or if accepted, higher loadings on your premiums may be applicable.
- Choice of stepped or level premiums: With stepped premiums, your rates will increase overtime as you get older. So, while it is affordable when you commence your policy at a young age, it gets quite expensive at later stages of life. Level premium rates are set at the time you start your policy and calculated on average throughout the life of your cover. It will stay the same regardless of your age and your health.
- Waiting period: The shorter the waiting period you have chosen, the more expensive your premiums will be.
- Benefit period: Longer benefit periods are more expensive than shorter waiting periods.
- Choice of indemnity of agreed value policy: Agreed value policies are generally 20% more expensive than indemnity value policies.
Is Disability Income Insurance Tax Deductible?
Disability income (income protection) insurance premiums are tax-deductible, whether or not a claim is ever made on the policy. Because of the character similar to that of an income, it also means that the benefit paid are fully taxable in the hands of the policyholder.
A specific taxation condition will be applicable to policyholders with TPD cover under disability income insurance - if they are totally and permanently disabled, they can choose to receive taxable monthly benefit or tax-free lump-sum benefit; however, the premiums paid are only 90% tax-deductible (Scott, 2009).
The Risks Are Real
You might be saying that finding yourself unemployed is far from happening, especially if you are in a stable company and earning a dream salary. But it is also a reality how volatile the economy is these days. Add to that the possibility of sustaining an injury from accidents both at and outside work.
If you are one of the skeptics who scoff at the idea of accidents happening, then you’d better look at the statistics which shows that 40% of the disabilities are from work-related accidents and 31% are caused by vehicular accidents. These are figures that cannot be ignored. The same way you get car insurance for your peace of mind despite knowing that the possibility of a car accident is slim, why not get protection for your biggest asset – your income.
With the monthly benefit you can get from an income protection payout, you will be able to commence with your life without having to worry about the financial obligations you have to pay. Simply put, you have an income to help meet your needs.
And with life insurance policies evolving, so are the benefits and features presented in income protection packages. Features and benefits may vary from provider to provider but the basics are still the same.
Income Protection Additional Benefits
The number one benefit you can get from income protection is none other than the security and peace of mind knowing that you have something to lean on when uncertainties come.
Second on the list is the steady stream of income which totals to 75% of your gross monthly earnings. This payout can be received until you are able to return to work. However, there are certain cases where a person is totally disabled and unable to work again. In such cases, income protection pays out the insured until he reaches 65 years old.
Nowadays, income protection insurance has an additional feature which helps you to transition smoothly when you return to work. It covers you for costs rehabilitation, re-training, adjustments and modifications incurred by the disability.
In addition to this, most insurance providers have a range of choices which you can put together to customise your coverage, so to speak, You can opt for the level of cover you want – a standard risk occupation cover which could cover you for up to $10,000, or a special risk occupation which covers you up to a maximum of $3,000. These choices give you more flexibility to choose the type of cover you need according to the budget you have.
Other additional benefits even extend the length of time you are covered – from 65 to 70 years old. Other income protection policies even let you avail of special care benefits, even death benefits.
Handy Tips on Comparing Disability Income Insurance Plans
Compare the features and options available on each policy
Different providers will offer different features and additional options; therefore, it is important to have a read through the Product Disclosure Statement (PDS) to gain a better understanding what they are and how they vary between providers. Carefully assess which policy will give you with the most benefits to match your needs, without blowing your budget.
Have a clear understanding of the terms and conditions
PDS is a very important document for you to have and read because it contains all the essential information that you should be aware of, as it will affect the outcome of your claim. Be aware of certain exclusions that may be applicable on suicide, high risk pastimes and dangerous occupations.
Choose your waiting period and benefit period wisely
As previously mentioned, both waiting and benefit period can affect the level of premiums you pay. It is important to have a good balance between the amount of premiums you can afford and the choice of waiting and benefit period that are appropriate to your financial situation.
Obtain a non-cancellable policy
Consider a policy that you can renew without having to provide further medical evidence, which can possibly increase the amount of premiums you pay or result in your cover being refused.
Consider tailored cover to suit your occupation
Certain disability income insurance policies provide tailored protection for specific occupations or industries in the event of a disability. For example, medical professionals, such as doctors or dentists, can take advantage of needlestick cover that is designed to protect them against occupational infection of a blood borne disease.
Applying for Disability Income Insurance
If you are thinking of applying for disability income insurance, there are a few criteria to meet in order to be eligible for cover:
- You must be between 18 to 59 years old (entry age usually varies between providers, so it is important to check the policy's PDS);
- You are an Australian citizen or permanent resident;
- You are working for at least 20 hours per week at your usual occupation; and
- You have held the same role for the last 12 months.
Some insurance providers may not require you to undertake any medical examination at the time of application; however, if you are generally in good health, going through a medical check-up may allow you to insure higher sums of coverage and cheaper premiums.
Different people will have different needs and there is no disability income cover that one-size-fits-all. It is essential to consult with an insurance expert who can provide you guidance in finding the right cover for you at the right price, taking out all the stress of having to do it on your own.Receive a preliminary quote on disability income cover