How to Compare Income Protection Policies

It can be challenging to choose the right income protection insurance policy. There are waiting and payment periods to think about, as well as trying to work out exactly how much cover you will need to protect you if you are not able to work. Here is our guide to comparing income protection policies.

Not all policies are created equally!

How It Works

Income protection insurance will pay out on up to 75 per cent of your income if ill health or an injury means that you are unable to work. Payments will continue until you are in a position to go to back to work. If your situation means that this is not possible, payments can be made for a certain number of years or until you reach a particular age (such as retirement age).

The exact amount that you will receive depends on the amount of cover that your budget will allow you to buy.

How Much Income Protection Insurance Do I Need?

The answer to this question will depend on your circumstances. You can potentially protect up to 75 per cent of your income, which would take care of a large proportion of your everyday living expenses. Don’t forget to factor in mortgage and debt repayments when you calculate how much cover you will need.

Not sure how much of your salary can be covered by income protection insurance? Take a look at our income protection insurance calculator. This handy tool will tell you how much of your monthly income can be protected.

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You can choose to cover less than 75 per cent of your income in exchange for lower premiums but this can be costly in the long term if you haven’t arranged enough income protection insurance to pay for everyday living costs.

Your premiums are affected by a range of factors, including your age, gender, location, health, lifestyle, occupation and policy conditions. This can have a big impact on how much income protection insurance you can realistically afford to purchase and can make it challenging to get a true picture of what your budget will buy. Talking things through with an expert advisor can be invaluable for making the right decision.

Things to Consider When Choosing a Policy

Some of the things that you need to think about when choosing an income protection insurance policy include:

What Is Covered: When you are comparing income protection insurance policies, make sure that you are completely sure of what is and isn’t covered by a particular policy. In particular, check the terms and conditions relating to payments. Some income protection insurance policies will pay out if you cannot perform your usual job role but others will require you to prove that you cannot perform any job role at all. The definition of “total and permanent disability” (TPD) can also vary a lot between insurers; make sure that you know how it is defined for the policies on your shortlist.

Waiting Periods: When you buy an income protection insurance policy, you must decide how quickly you want your payments to start after making a claim. This can be anything from two weeks to two years.

Think about how long you could realistically afford to not be earning and use this as your benchmark. For example, annual and sick leave may mean that you could hold out a little bit longer than someone who does not have this to fall back on.

Your choice of waiting period will impact on the cost of premiums; a shorter waiting period means bigger premiums.

Payment Periods: You will also need to choose how long you will receive payments for. This is often for a set number of years (such as two or five years) or until you are a certain age (such as when you reach the age of 60).

Bear in mind that your policy will only pay out for the agreed payment period. Choosing a the best payment period for your needs can therefore be tricky as you need to factor in the worst case scenario of not being able to work at all.

As with waiting periods, the length of your payment period will affect the cost of your premiums. A longer payment period will result in higher premiums, for example.

Will Premiums Rise?: Premiums can be either stepped or level. Stepped premiums are usually cheaper than level premiums in the beginning but they will often rise as you get older. In contrast, level premiums can be more expensive to begin with but are generally the more affordable option in the long term as they will not increase.

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Buying Your Income Protection Insurance

There are several ways to purchase income protection insurance, including:

Direct Life Insurance: Buying directly from an insurer lets you decide the payment period and other conditions relating to the policy. While you are in complete control, it is worth remembering that you will not receive professional advice during the buying process. This could result in you making decisions that are not the best option for your situation, especially with regards to the level of cover that you need.

Through an Advisor: As with direct life insurance, you have freedom to choose the conditions of the policy. Buying through an adviser allows you to access professional advice and make an informed decision about the type of income protection insurance that will work best for your needs. This significantly reduces the possibility of buying income protection insurance that is not right for your situation. Here at Income Shield, we will work with you to choose the most appropriate policy for your needs.

Through Your Super: Income protection insurance is also available through your superannuation fund. However, this tends to amount to very basic coverage and you will often be unable to choose your policy conditions. Your cover may also end if you change jobs or switch super funds.

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