Income Protection insurance is a monthly benefit that is paid to the insured person which can be up to 75% of their income if they are not able to work as a result of a trauma , accident or illness. It pays you until you are able to return to work after you have served the nominated waiting period you have elected. If you are unable to return to work the insurer will then keep on paying you up until the benefit period specified under your policy and this is usually up until the age of 65 unless you have selected otherwise. The benefit period will also depend on your occupation.
Income protection helps to ensure that you are able to continue to meet your financial obligations such as paying the mortgage or rent, daily expenses, and in providing for your family. It is also tax deductible.
It's important to understand what's covered as there is a number of different policy features offered for this type of insurance. More than likely the more benefits that are available under the policy, the more the insurance will cost. Therefore it is important to understand that the cheapest policy isn’t always better as the options available under that particular policy may not be suited to your circumstance.
Some of the important information you will need to decide on when selecting the right policy include:
Agreed value VS indemnity
Some policies have the option of agreed value or indemnity value.
Agreed value VS indemnity
Agreed value is when you are paid the monthly sum agreed upon at the time of your application.
Indemnity cover is when the amount paid is based on your income at the time the claim is made. This could be beneficial for you if your income increases, but not so good if for example as an owner of a business, your income decreases.
You have the option of nominating how long you're prepared to wait for before the first payment is made due to being unable to work due to an illness or injury therefore not receiving an income. It may be that you can afford to have a longer waiting period instead of having 30 days you may have a 90 day waiting period and are able to live of your own assets whilst serving the waiting period. By increasing the waiting period you are able to achieve a bigger reduction on the premium.
This is the benefit period that is selected in which you are paid the monthly benefit amount up until a certain period of time whilst not being able to return to work. For example if you have nominated a benefit period of 2 years the insurer will pay you for up to 2 years while being unable to work, and then the benefit will cease to be paid. Where a policy has a payout period of 2 years for example, it will be much cheaper than a policy that has a benefit period which continues to pay you until you reach the age of 65.
Any or own occupation
Definitions do vary between insurance companies however the differences between the two definitions could be broadly summed up as follows:
Own Occupation – When the insurance benefit is paid due to an illness or injury under which you are unable to work ever again in your own occupation.
Any Occupation - When the insurance benefit is paid due to an illness or injury under which you are unable to work ever again in any occupation which you are reasonably suited to depending on your experience or education.
An example of "Own" occupation definition is usually given for example where a surgeon may lose his hand causing the surgeon to be disabled and is therefore is able to make a claim, whereas under an "Any" occupation definition the loss of a hand may still leave him able to perform the duties of a General Practitioner and therefore he is unable to make a claim. "Own" occupation definition is a more expensive option.
Many Superannuation funds may also include a form of income protection cover and it is important to understand what you are covered for such as the benefit amount or other important details. Income protection insurance available through your superannuation fund is usually capped at a two year term. People in this scenario may consider a separate but complementary policy with a longer term that kicks in after a two year waiting period.
Married 35 year old couple who have four kids, a $450,000 mortgage with the father earning an income of $80,000 a year and the mother’s works part time earning $30,000 a year. The father is required to take 7 months of work due to an illness.
Income protection insurance will pay him $5000 per month until he is able to return to work, allowing the family to continue paying the mortgage and meeting their living expenses.
We compare all the leading insurance companies to find you the right income protection policy. With flexible cover options and simple processes, access to income protection insurance has never been easier.