Income Protection Insurance: Know the Essentials

Most of us understand the importance of protecting our health, homes and cars through insurance but what about your ability to earn an income? This is often overlooked but there could be devastating financial repercussions if ill health or an accident means that you can’t earn – even temporarily.

Safeguard Your Nest Egg!

The average Australian household spent just over $69,000 on household living expenses in 2014. This far exceeds the maximum level of financial support that is available from the Australian government for those who are unable to work due to disability. This significant discrepancy can be impossible to bridge without substantial savings to fall back on.

Fortunately, you can protect yourself by buying income protection insurance. This will ensure that there will still be money coming in even while you are off work and unable to earn. It will not completely replace your income but it will go a long way towards helping you to continue your current standard of living if the worst were to happen.

How It Works

Income protection insurance will protect up to 75 per cent of your income for a set period of time (known as a payment period) if sickness or injury leaves you unable to work.

For most people, payments will continue until you are able to go back to work. If this is not possible and your illness or injury leaves you unable to return to work, it can cover you for a set number of years or until you reach a certain age.

You can arrange for your payments to start as soon as possible after your claim has been processed but this will result in higher premiums. Generally speaking, a longer waiting period will mean that you pay lower premiums. If you have sick or annual leave from your job, you could probably afford to have a slightly longer waiting period – and pay lesser premiums as a result.

Types of Income Protection Insurance

There are several types of income protection insurance, notably:

Indemnity Value – This is the most common form of income protection insurance and is less expensive than an Agreed Value policy. With this type of policy, you must verify your income when making a claim and your benefit may then be altered in line with this.

Agreed Value – This form of income protection is more expensive than an Indemnity Value policy and is less popular. With this type of policy, you are paid an agreed benefit to reflect your income at the time of buying cover. Income fluctuations are not taken into account, which can be problematic if you are self-employed.

Through Your Superannuation Fund – There is also the option to buy income protection insurance through your super fund. This is usually the cheapest option, although it can turn out to be costly in other ways. It usually only includes basic protection and is much less flexible in terms of policy conditions such as choosing your payment and waiting periods. However, it can be a good option for those who would otherwise be unable to purchase income protection insurance.

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How Your Premiums Will Work

Premiums can be of the stepped or level varieties:

Stepped Premiums – An income protection insurance policy with stepped premiums can be cheaper initially but the costs can increase over time. In the long term, this can mean that you actually pay more for your cover. If you do not intend to stay loyal to one particular insurer, this can be the

Level Premiums – An income protection insurance policy with level premiums is usually more expensive than stepped premiums initially but does not rise. In the long term, this often balances out as the most cost effective option. It is a good option if you plan to stick with the same insurer but you can lose out if you plan to shop around.

Premiums are also affected by age, gender, health, lifestyle, occupation and your chosen waiting period.

Applying for Income Protection Insurance

When you first arrange cover, your insurer will want to know about your health and lifestyle – including any pre-existing conditions. Don’t be tempted to lie at this point; withholding details can lead to your claim being rejected further down the line.

Claims

You must provide evidence of your illness or injury when you make a claim. If you were not fully honest when you arranged cover, your insurer may decide to reject your claim on this basis and you would not receive the agreed payments.

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