Income protection insurance:Let’s say you are the only source of income in your family. When working at full capacity, your life and family are comfortable. However, if an unforeseen situation (such as a disability) prevents you from working, you could find yourself in a hard situation.
As you know, Illness and injuries can pop up at any time, and depending on your situation, they can put pressure on your finances. With the help of income protection insurance, you can lessen the stress if you find yourself unable to work. Many people shy away from this policy and only invest in auto insurance.
What is Income Protection Insurance?
Income protection insurance is a type of life insurance that supports you financially if you become partially or totally disabled and cannot work. It provides a portion of your income while you recover or transition to new work.
Found mainly in Australia, Ireland, New Zealand, South Africa, and the UK, income protection insurance (IPI) supports policyholders who can’t work due to illness or injury by providing benefits. These policies were once known as permanent health insurance (PHI). In the USA, the equivalent concept is called disability income insurance or disability insurance.
If you work in a low-risk environment, you might not consider income protection insurance essential. However, if you have a high-risk job, such as in trades, it can be more beneficial. The amount of income replaced and the length of coverage depend on the insurer you select. It’s important to choose the income protection plan that aligns best with your needs.
What are the types of Income Protection Insurance?
There are various insurance options that you should consider during your research. Some of these types of policies include:
- Redundancy insurance
- Mortgage protection
- Self-employed worker insurance
- Personal accident
- Sickness and accident insurance
There are various types of income protection that offer levels of coverage for certain areas of concern. For instance, if you are self-employed, then a very high level of protection may be necessary. It is advisable that you discuss your circumstances with your insurance provider first.
What does Income Protection Insurance Cover?
Income protection insurance varies by policy, but generally, it supports workers with partial or total disability. Typically, it replaces up to 90% of your pre-tax income for the first six months and up to 70% for a specified period after that.
The coverage is based on your ‘pre-disability income,’ calculated from the 12 months before your injury or illness. Some insurers may set a monthly limit, like CommBank, which caps pre-disability income at $10,000 per month. The amount you receive can also depend on whether your disability is full or partial. Always review the product disclosure statement (PDS) before purchasing any policy.
What does it not cover?
Most insurance policies have common exclusions, so it’s important to review the PDS to understand them fully. For reference, conditions not covered often include:
- Injuries from self-harm,
- Pregnancy-related issues,
- War or civil disturbances, and
- Military service.
Moreover, if your injury or illness is not severe enough to prevent you from working, your claim may be denied.
Who does not need Income Protection Insurance?
Income protection insurance might not be necessary if your job offers generous sick pay, providing income for at least 12 months. Or;
- If you can rely on government benefits that meet your living expenses,.
- You have sufficient savings to sustain yourself over a long period of time.
- Early retirement is an option for you.
- Your partner or family can provide enough income to support you.
How much does it cost?
Insurers will want details about your lifestyle and health history to determine your monthly payment amount. Various factors influence your premium costs, such as:
- Your age
- Your medical history
- Your alcohol intake
- Whether you smoke or not
- Your job
Different professions carry varying risk levels; for instance, working in a high-risk job may lead to higher premiums.
Requirements to Apply for Income Protection Insurance
When you want to apply for this policy, there is certain information you need to provide to your insurer. This includes your occupation (physical requirements, location, and hours), financial information (tax returns, pay slips, etc.), medical history, age, and lifestyle. Ensure that you answer the insurer’s questions correctly and honestly. If you do not, it is very possible that the policy may have tighter definitions or more exclusions.
How to buy income protection insurance
When looking to purchase income protection insurance, you have a few options to consider. You might already have some coverage without knowing it, so check each source thoroughly before choosing a provider.
Super Fund:
Superannuation funds may offer default income protection, either automatically if you meet certain criteria or as an additional purchase. Getting insurance through your super fund is often more affordable. Premiums come out of your super balance, but you might not get tax deductions and may have fewer benefits and features. Research your fund’s coverage to see if it’s a good fit for you.
Direct and Advisor Providers:
Beyond your super fund, you can choose between direct or advised policies. Direct income protection is bought straight from an insurer, while advised policies come through financial institutions like banks or brokers. While financial advisors can’t earn commission on investment advice, they may still receive it for selling life insurance products, so check carefully to ensure the product suits your needs.
Direct purchases are quicker and simpler, while advice options offer professional guidance but might involve longer processes. Weigh the pros and cons of each method to find what suits you best.
How can I file for a claim?
If you secured your policy through an advisor, they should be your initial point of contact. Once the waiting period ends, income-related claims are typically processed within two months. Reach out to your provider directly to initiate a claim.
For more immediate help, contact your insurer; you might receive an advance payment while your claim is being assessed. Remember, any payment from an income protection policy must be reported on your tax return.
The benefit period is the length of time your insurance will cover you. Usually, you can choose coverage lasting two to five years or until a certain age. Longer coverage tends to cost more, so think about how much protection you want before deciding.
