Income protection insurance pays a percentage of your income if you’re unable to work. The insurance can help pay your bills while you focus on your recovery. Income protection insurance generally pays you up to 85% of your pre-tax income for a specified time if you’re unable to work due to partial or total disability. Each income protection policy has its own definition of ‘partial or total disability’ that must be met before a claim is made, so it’s important to carefully assess the applicable Product Disclosure Statement (PDS) before taking out a particular policy.
Income Protection Policy Type
Income protection policies are provided as either an:
- Indemnity Value Policy. The amount you’re insured for is a percentage of your salary when you make a claim. If your salary has decreased since you bought the policy, you’ll get a smaller monthly insurance payment. Indemnity value policies are generally cheaper and can be useful for people with a stable income.
- Agreed Value Policy. The amount you’re insured for is a percentage of an agreed amount when you sign up for the policy. These are generally more expensive but can be useful if you have income that changes from year-to-year.
There is a waiting period applied to the payout for each type of policy, varying from two weeks to two years. The more affordable policies provide a longer waiting period while a policy with a shorter wait period will normally attract a premium. In deciding what policy is suitable for your circumstances you’ll wait to consider your financial position, and how long you’re prepared to wait for financial support.
The benefit period is how long the monthly payments will last. Most income protection policies offer between two and five years of payments, or up to a specific age, such as 65 or 70. The longer the benefit period, the more expensive the policy. But it also means greater protection if you’re unable to work for a longer time.
Stepped or Level Premiums
You can generally choose to pay for income insurance in the following ways:
- Stepped premiums. The stepped premium is recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age. This is the most common type of policy.
- Level Premiums. In the case of a level premium, you are charged a higher premium at the start of the policy, but changes to cost aren’t based on your age so increases happen more slowly over time.
Deciding which option is right for you comes down to what is most appropriate for your situation – do you want to pay a bit less now knowing the price will go up over time, are you happier with the security of your age not impacting your premium each year, or does your situation call for the cover to drop each year but not go up much in price?
Standard or Plus/Comprehensive Cover?
Income protection insurance is important to cover your everyday expenses and bigger financial commitments should you become sick or injured and unable to work for a period of time. There are many options available to you and many differences between products and the levels of cover they provide. Most are flexible and allow you to choose when your cover starts, how long you will be covered for, and what percentage of your salary is protected.
Critical Illness or Trauma insurance provides a one-off payment should you suffer from a condition that is covered by your policy. Standard cover provides benefits for the most common critical conditions with few additional options, at a lower cost. Whereas Plus cover provides benefits for a more extensive range of critical conditions with additional options available to match your circumstances and preference.
Advantages of Comprehsive Cover – Is it Worth it?
With a comprehensive cover policy (over a standard cover policy), you generally receive additional benefits for a slightly higher premium, such as:
- Faster claim payout.
- Claim a % of your policy regardless of the level of damage to your health so you can take the time you need to fully recuperate and prevent future relapse or associated issues.
- Higher claim limits available.
- Waiver of premium while on parental leave or during a claim period.
- Waiver of waiting periods for specific medical conditions.
- Remember too, income protection insurance is often tax deductible, seek advice from an insurance professional to understand your options.
Choosing the Level of Cover
Income protection insurance is an important part of any financial plan. By looking at your finances before purchasing insurance, you’ll be able to gauge:
- How quickly will you need to access a payout?
- What financial obligations do you have now, and are you likely to have in the future that will determine the amount of cover you need?
- Do you have any existing medical conditions or a family history of any health issues that could affect your ability to make a successful claim?
- Do you have a life insurance policy with a death benefit?
- How long will you need to rely on financial support from your payout?
Benefits and Drawbacks of Super Income Protection Insurance
Purchasing any type of insurance through your Super policy is introduced here. A cursory look at the benefits and disadvantages is introduced below.
Super Insurance Benefits
- Less Expensive Premiums. Premiums are often less expensive as the policy provider will usually purchase policies in bulk. However, as we’ll come to point out, this also means that each policy is generic and does not necessarily suit your circumstances.
- Easy to pay. Insurance premiums are automatically deducted from your super balance. This may limit your final super payout over a number of years.
- No medical. Many super funds will accept you for a default level of cover without health checks. This can be useful if you work in a high-risk job or have health conditions that potentially makes it difficult to get insurance outside super. However, many policies exclude known or pre-existing health conditions.
- Increased cover. You can usually increase the amount of cover you have above the default level. But you’ll generally have to answer questions about your medical history and do a medical check.
- Tax-effective payments. An employer’s super contributions and salary sacrifice contributions are taxed at 15%… lower than the marginal tax rate for most people. This may make paying for insurance through super tax-effective (please talk to us for more information).
Super Insurance Disadvantages
- Limited Cover. A superannuation fund is designed for Super, so it is unlikely to include the scope of cover offered by a purpose-tailed product outside of Super. The super product is generic and a range of conditions and exclusions are likely to apply.
- Conditional Policy Cover. Cover is predicated on an active policy with regular contributions. If the Super policy is left dormant, or isn’t used, the cover will also cease.
- Reduces Your Super Balance. For those that take their super contributions seriously, rolling in cover or additional cover through a Super fund will reduce your Super balance, thus reducing the payout at retirement.