Understanding Income Protection
Understanding Income Protection Basics
Income protection insurance is essential for all people who would suffer financially if they were unable to earn income from working. This includes single people whose own lifestyle would suffer if they were unable to earn income as well as people who have financial dependents, such as parents.
The concept of income protection insurance is simple. If you purchase a policy and then become unable to work due to illness or injury, the insurer will pay you a benefit.
The benefit period
Different policies have different terms. Some policies will only pay benefits for a relatively short period of either two or five years. Other policies will pay benefits up to a predetermined age, such a 60, 65 or (in relatively rare cases) 70.
How much does income protection cover?
The amount of income to be protected can either be agreed at the time the policies taken out (known as an agreed value policy) or can be calculated at the time of the illness or injury (known as an indemnity policy). Either way, the insured person needs to prove to the insurer they were in fact receiving income when they became ill or injured. Income protection benefits are usually limited to around 75% of your employment income, because there needs to be an incentive to go back to work.
Generally, there will be a waiting period, which is the time between when you first become unable to work and the point at which benefits will start to be paid. A standard waiting period is 30 days, but this can be shortened as little as 14 days or extended to periods such as 60, 90, 180, 360 or 720 days. Obviously, the longer the waiting period, the longer it will take for benefits to begin to be paid, but these reduce the cost of the premiums. However, the whole point of insurance is to protect the insured person against the effects of illness or injury. Therefore, a longer waiting period should only be taken out if a person is able to finance a shorter duration illness or injury themselves, whether through sick leave or cash reserves. Shorter waiting periods are appropriate where there isn’t any such assistance.
Your Medical history
Sometimes, an insurance policy will be offered with exclusions or loadings. As the name suggests, an exclusion occurs where the insurer stipulates an illness or injury for which they will not pay a benefit. Typically, these are pre-existing illnesses/injuries or illnesses/injuries that have a high probability of occurring. Someone with a history of back complaints, for example, will often have exclusions placed on any back related injuries.
At the time that an insurance policy is taken out, the insurer asks the insured person a comprehensive set of questions about their health. The insurer may ask you to attend for a medical examination as well. It is very important that when apply for insurance you always tell the truth at this point, as the law generally allows an insurer to avoid payment on a policy where an insured person has not been honest with the insurer.
Is income protection really necessary?
Income protection is a really important form of insurance for anyone whose day-to-day expenses are reliant on their ability to work, and lets face it, that’s most of us. Check our article explaining that your ability to work could well be your biggest asset.
While the range of options can seem somewhat overwhelming, good advice can help you navigate those complexities to provide you with insurance that strikes an sensible balance between comprehensiveness of cover and affordability. When you seek advice from us we can look at your options with a range of insurers as well as your options for cover through your super. Finance Women operates as a purely fee-for-service adviser, you pay us directly, since we don’t accept commissions from insurers, we can often negotiate a premium up to 30% lower than if you were to approach the insurer directly.
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