The Basics of Income Protection Insurance
Insurance provides peace of mind and a back-up plan in the event of financial loss. We insure our cars, pets, boats, mobile phones and other assets. Often overlooked is covering one of your most important assets, your income.
We rely on our income to not only cover our other insurance bills, but to pay for our mortgage or rent, utilities, transport, school fees and to simply put food on the table.
But what would happen if you were unable to generate an income for a period of time?
Would you be able to meet your financial obligations? How much would the lifestyle you’ve worked so hard to create be affected? Could you fund your retirement if you were never able to return to work again?
Income Protection Insurance replaces up to 75% of your monthly income, in the event that you are unable to work due to accident, injury or illness.
Things to consider when it comes to income protection:
- The waiting period
- The benefit period
- Agreed value or indemnity
- Super or non-super
We look into all of these considerations below:
The waiting period
The waiting period is the length of time from the event of injury/illness that you’ll need to be off work before your insurance will start to pay a benefit.Most commonly, people will look at a 30, 60 or 90 day period, taking into consideration how much sick/annual leave they have, savings they can draw on, and other income streams that may assist them in the short term such as spousal or investment income.
A shorter waiting period will cost you more. Income Protection benefits are generally paid on a monthly basis in arrears.
The benefit period
The benefit period is the maximum length of time you will receive a benefit for any one injury or illness. These are usually 2 or 5 years or until the age of 65 or 70. People will generally consider their long term financial commitments when making this decision.If you have long term loans/mortgages to service or a young family, you may prefer a longer benefit period such as to Age 65 or 70, to cover scenarios where you may never be able to return to work again. Shorter benefit periods are sometimes preferred by those have other income streams or assets they can liquidate.
It’s important to understand that if you select a shorter benefit period, that if you remain off work after the benefit period has ceased, that you may have no income at all. Certain higher risk occupations may only be able to access shorter benefit periods.
Agreed Value or Indemnity
An indemnity contract means, that should you need to claim, the insurer will use your income at the time of claim to validate the amount you’ve applied for. It’s usually taken by employees on a stable income with less chance of their salary decreasing, and is a cheaper option than Agreed Value. For an Agreed Value contract, you will generally prove your income when you apply, and in turn the insurer will agree to pay you the monthly benefit should you need to claim, even if your income reduces.
Under an Indemnity contract, should your income reduce, your benefit will be based on up to 75% of the proven income at time of claim, up to the sum insured. People with fluctuating incomes, such as the Self-Employed, can often prefer the certainty of an Agreed Value policy.
Super or non-super
Income Protection policies can be funded either by yourself via a policy that you own, or through a participating Superannuation fund. By owning the policy yourself, you may be able to access better policy definitions and features that are unable to be offered through Superannuation, which may impact your ability to claim. Premiums funded outside of superannuation are also generally tax deductible. However, you may be able to fund your premiums via an SMSF or via partial rollover from a participating superannuation fund.
People generally use Superannuation as a funding mechanism when they know they need cover, but may not have the cash flow to cover the premiums themselves. Bear in mind that funding your insurance this way will reduce your Superannuation balance. You may be eligible for a discount when paying by partial rollover.
What should I do next?
Speak to our qualified Advisers about what’s important to you. We have a comprehensive range of Income Protection products that may assist in providing peace of mind that should you be unable to generate an income, the important things in your life will be taken care of.