Income Protection InsuranceYour Guide to Safeguarding Your Salary

Imagine that something happened today, and your income disappeared for several months or longer. If you have income protection insurance, this scenario might not faze you.

If you don’t, the prospect of losing your income might fill you with dread. If that’s the case, it’s time to consider income protection insurance. This guide explains what you need to know, from how it works to how you can lower your premium.

What is Income Protection Insurance?

Income protection insurance replaces a portion of your income if you are temporarily unable to work due to illness or injury. Generally speaking, most policies cover up to 75% of your pre-tax income for a set period of time.

Income protection is different from total and permanent disability (TPD) insurance; with TPD insurance you are unlikely to return to work at any point. With income protection your injury or illness is temporary.

What is income protection cover?
How income protection insurance works
Ongoing benefit rather than a lump sum payment

Pays when you are temporarily unable to work due to injury or illness
Replaces up to 75% of your salary

Stops paying out when you return to work or at the end of the benefit period.
 

Who Can Use Income Protection Insurance?

If you own a home or a car, have children, or are paying off debt, income protection insurance could be a smart move. Broadly speaking, income protection insurance is for anyone who relies on their income.

Income protection insurance can be especially important for people who are self-employed or own their own business. If you’re self-employed, you don’t have the safety net of sick days—if you can’t work, you don’t get paid.

This is where income protection insurance can help. It provides you with a source of cash, so you can get well without feeling the pressure of lost income.

What is income protection for?
Income protection insurance can go towards a range of expenses, such as:
Car payments

Rent or mortgage
payments
Utility bills

Your grocery shop

Child care

Credit card debt

 

Why Do I Need Income Protection Insurance?

Insurance offers people peace of mind, but more importantly it provides you with money when life throws you unexpected changes. When someone loses their income suddenly and is unable to work, it can have a serious impact on their financial situation.

Consider what would happen to you if you were unable to work for months or even years. Would you have enough money to cover your regular expenses, not to mention any medical bills that may accrue? If the answer is no, maybe it’s time to consider income protection.

Time off work
Approximately 786,000 Australians had a health condition that resulted in time off work and accessed income support.

6.5 million people use sick leave to cover a short-term illness, but sick leave is not available to self-employed workers.
 

Establishing Your Benefit Level

There are two ways that your insurer can determine your benefit: indemnity value or agreed value. No matter how your benefit is calculated, you must have been working at the time of the illness or injury.

Indemnity Value

With the indemnity value model, your insurer will calculate your benefit based on your
circumstances at the time of your claim. Even if you were earning a higher income when you applied for income
protection, your benefit will be based on your current income.

This benefit structure tends to be cheaper than the agreed value model, because there is an
element of uncertainty.

Agreed Value

With agreed value, you and your insurer agree to the benefit level at the time that you make your application. Regardless of how your income fluctuates, you are covered for the amount you
initially agreed upon.

Remainder of loan term: $1,263 This benefit structure tends to be more expensive than indemnity value, because you are paying for the security of knowing your benefit.

 

Defining a Disability for Income Protection Purposes

The definition of a disability for income protection purposes isn’t standardised; It’s up to your insurer to establish its definition. With that said, there are usually two types of disability definitions.

Partial Disability

With a partial disability you may still be able to work, but in a reduced capacity. Your income post-injury or illness is less than it was before.

Total Disability

You are unable to work in your occupation due to your injury or illness. Your insurer will likely request evidence that you are seeing a medical professional and following their advice throughout your recovery period.
 

Optional Features and Benefits

Each insurer’s income protection policy will look slightly different, and may even come with optional features and benefits. Here are some possibilities that you may come across:

  • Spouse Benefit: Additional benefit paid if your spouse has to take time off of work due to your injury or illness
  • Partial Disablement Benefit: Reduced benefit payment if you are able to work in a reduced capacity as your recovery progresses.
  • Rehabilitation Benefit: Covers some costs of rehabilitation, like workplace modifications, to help you get back to work more quickly.
  • Pause Your Cover: Pause your cover for a set period of time if you’re facing hardships and unable to pay your premiums. No claims can be made while cover is paused.
  • Day One Accident Benefit: Backdate your benefit payments to the day of your injury. Restrictions apply; this benefit is usually not available to all occupations.
 

Setting Your Premium

As with other types of insurance, there are a few factors that come into play when your insurer sets your premium. For example, someone in a high-risk occupation may have a higher premium than someone in an office job.

How Your Insurer Decides Your Income Protection Premium
Age

Gender
payments
Occupation

Smoking Status

Policy Type

Health & Medical
History
Waiting Period

Benefit Period

Benefit Amount

 

Claiming on Income Protection Insurance

Your insurer will need to see proof of your injury or illness when you make a claim. Check with them for specific details on the type of information they need; for example, a letter from your doctor.

Benefit Periods for Income Protection Insurance

Your benefit period is the maximum time period that your insurer will pay out your claim. This is usually 2 years or up to age 65; however, in some cases you may elect to have the claim paid out for longer or up to age 70.

Longer benefit periods usually come with higher monthly premiums. Insurers may also reduce the payout after a certain age, or cap it at a maximum amount. Any applicable restrictions should be clearly defined in your Product Disclosure Statement (PDS).

Can I Work While Receiving Income Protection Insurance?

If you are able to return to work full time, your income protection insurance will usually cease paying out. However, some policies may allow you to work for reduced hours (for example, up to 10 hours per week) without reducing your benefit.

Check the terms and conditions of your policy for specific details.

 

Waiting Periods for Income Protection Insurance

Your waiting period is how long you have to wait after an injury or illness before you can make a claim. Available claim periods depend on the policy; 30 to 60 days is common but waiting periods can be longer or shorter.

Consider your financial situation when choosing a claim period: if you have sick leave or access to emergency funds, you can elect to wait longer. The longer your waiting period, the lower your monthly premium.

 

Income Protection Through Your Super

Most super funds offer income protection. The advantage of getting income protection through your super is that you’ll pay your premium with pre-tax dollars. This is easy to manage, frees up cash flow, and could save you money, but remember that it will also reduce your super balance.

Comparing Income Protection Insurance

Your insurer will need to see proof of your injury or illness when you make a claim. Check with them for specific details on the type of information they need; for example, a letter from your doctor.


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