Any working person has surely heard about income protection. In fact, it is something that any person who is employed should consider. Income protection is an insurance policy which pays benefits to policy holders who have been unable to work in the event of redundancy, illness or accident.

Income protection, though it will not prevent you from getting sick or having an accident, could pay up to 75% of your normal gross income. That is why income protection is a necessity, especially if you are a breadwinner. It could still provide an income for your family if you are unable to work because of illness or injury. Even if you’re single, it is still a must have because it will help you pay the bills and will let you have another source aside from your savings if something unlikely happens to you.

While the coverage may vary according to the type of policy you chose, it usually covers situations like injuries and illnesses. You could also choose how long you want to receive payments – you can either receive payments until you get back to work, or until you reach the maximum time stated in the policy you chose.

How is Income Protection Calculated?

Although most people have heard what income protection insurance is, they might still have no inkling how income protection is calculated. How do insurance providers determine income insurance cost? How do you know that you are getting the real deal and not just getting ripped off? Insurance providers follow a certain guideline or metrics when calculating the cost of the policy namely, your job, your age, your gender, your lifestyle, the deferred period, and retirement age.

• Job. The type of occupation you have will greatly affect the amount of the premium you are going to pay. The higher the risks your job has, the higher the premium is. Basically, income protection is divided into three types in terms of occupation – for white collared workers who work in offices, blue collared workers exposed in dangerous environments, and self-employed individuals.
• Age. Obviously, as you get older, so does your monthly premiums. It is advisable, then, to start young. It is cheaper and you get longer coverage.
• Gender. Though discrimination has nothing to do with the calculation of your insurance, your gender can give an unexpected twist on your monthly premiums. Despite the fact that women are paid lower than their male counterparts, insurance providers argue that women are more prone to health risks like breast cancer, or to other health complications brought by pregnancy. The possibility of early retirement in order to take care of the family is also higher in women than men.
• Lifestyle. Your health probably has the greatest effect on how your premium is calculated. If you are a smoker, then you are more likely to have higher monthly premiums than the non-smoker. Other factors which may fall under this category are your involvement in extreme sports. If you happen to have a penchant for these dangerous activities, then insurance providers would make you pay a higher premium.
• Retirement age. If you plan to retire older, your premium would definitely be much higher. Although the retirement age is 65, it is not always a necessity to keep paying for income protection up to this age if you plan to retire at 60. By lowering the age of your retirement policy, you could save a total of five years from your premium.
• The deferred period. This period is the time before you get paid the monthly benefits. The shorter the deferred period, the higher the premium becomes. The rationale for this is the shorter the deferred period is, the higher the possibility of making a claim. By changing your deferred period to around 4 – 13 weeks, you could save up to 50% from your monthly premiums.

How much is Income Protection

After looking at the different factors which affect the cost of premium for income protection, you might still be wondering and asking this question – how much is income protection insurance?

The answer to this is relative, because the cost of the monthly premium would depend on the policy and company you choose. Each insurance provider has some requirements which hugely affect the cost of the policy. Moreover, your willingness and the availability of your funds will also affect how much your income protection policy will be. Therefore, although the cost of your monthly premium depends on the policy or coverage you chose, the maximum amount you could purchase is up to 75% of your current gross income if you are employed. This includes packaged fringe benefits and your employer’s superannuation contribution. On the other hand, you pay 75% of the total profit generated by your business minus your share of expenses. On a side note, the cost of your income protection comes in second to the benefits it could give you later.