Being able to provide and maintain an income is incredibly important to a person’s financial position and ability to make a living on a day to day basis. When that income is no longer available, it can have a significant impact on ones life.
Income Protection Insurance is designed to protect you in the event that you are unable to work and earn an income due to sickness or accident.
Income Protection will generally pay you a monthly benefit of up to 75% of your monthly salary, helping you to pay your mortgage, day to day living expenses and any potential medical expenses. Essentially you can use the monthly benefit paid by the policy as you see fit.
Are all income protection policies the same?
No, not all income protection policies are the same. It is important to know that not only will policies differ between insurers and individuals; there are a number of common differences between them too:
1. Built in benefits:
Built in benefits are generally included as standard in one policy may be a paid option in another. There may not apply to all policy holders but only to persons in certain occupation categories such as Needlestick cover for nurses and doctors.
2. Definition of income:
Pre-disability Income (Indemnity Value)
Every Insurance company will generally ask for you to prove your pre-disability income so they are able to substantiate you have the level of income you are insured for. Depending on the insurance company, you will need to provide:
- Your previous 12 months income; or
- Your best consecutive 12 months of income over the past 2 years; or
- Your best consecutive 12 months of income from previous 3 years.
Pre Application Income (Agreed Value)
- Insurers will generally ask for your previous 12 - 24 months income at the time of policy application, depending on the insurer.
3. Definition of total and partial disablements:
In order to claim under a total disablement benefit, insurers will generally assess you based on your inability to:
- Perform the duties of your usual occupation; or
Select Insurers may also offer you the choice of being assessed by your inability to:
- Earn a certain percentage of your regular income; or
- Work a certain number of hours in your usual occupation
Please note that not all life insurance companies will use the above criteria and each insurance company’s requirements will differ. You will also be required to be under the advice of a medical practitioner.
In order to claim under partial disablement, insurers will generally require you to have been totally disabled during the waiting period before you can move onto a partial disablement benefit. Select insurers may offer the partial disablement benefit from day 1.
How long you will need to be totally disabled for before becoming eligible to go on a partial disablement income protection claim will differ between insurance companies. Please consult your PDS for further information or contact one of our advisors.
When you are conducting a policy comparison, there are a number of areas you need to consider including:
1. Policy Type
a. Indemnity Value
Your monthly benefit will be the lesser of the monthly benefit insured according to the policy schedule, or 75% of your pre-disability income.
Therefore, if your income reduces between the time of the policy application and the time of the claim, your monthly benefit may be less than the amount shown in your policy schedule.
Due to this, indemnity policies generally cost less than agreed value policies.
b. Agreed Value
Your benefit will be agreed upon at the time of your application and will be based on your pre approved income at that time. You will generally need to provide proof of your income at the time of application. If you are unable to do so, you will be required to provide proof at a later stage.
In some cases, life insurance companies will not proceed with an agreed value application until they have seen proof of income, which is generally your most recent tax return.
Some insurers will ask for your previous 12 months income while others may ask for the last two years of tax returns.
c. Guaranteed Agreed Value
Works essentially the same way as agreed value but select insurers will convert your policy from agreed value to guaranteed agreed value if proof of income is provided.
With both agreed value and guaranteed agree value, as your benefit is pre-determined, it will not be affected by any change or reduction in your income.
2. Waiting Period:
The waiting period is the length of time you have to be off work due to a sickness or accident before your monthly benefit will commence. Waiting periods offered will differ between insurers and you will generally have a choice of 14, 30, 60, 90, 180, 360 or 720 days.
Generally the longer the waiting period is, the cheaper the premiums due to the fact that the sickness or accident needs to be more severe before the monthly benefit commences.
3. Benefit Period:
The benefit period is the maximum amount of time the insurer will be pay your monthly benefit should you be required to go on an income projection claim. The benefit period will differ between insurers and individual policies, but will generally range from 2 years to 5 years or up to age 55, 60 or 65, with select insurers extending this to age 70.
Generally, the shorter the benefit period is, the cheaper the premiums as the liability to the insurer is reduced due to the less amount of time they are exposed to the liability.
4. Monthly Benefit:
If you go on an income protection claim, you will receive a monthly benefit of up to 75% of your salary. The monthly benefit is quite unique to income protection insurance in the sense that it pays a monthly benefit for the life of the benefit period, rather than one lump sum payment like other forms of personal insurance.
Generally you will only receive your monthly benefit until:
- You are able to return to work
- Your policy expiration
- Your death
- Your benefit period expiring.
5. Premium Types:
There are generally two types of premiums:
– generally start off cheaper than level premiums but increase with your age each year.
– generally start off more expensive than stepped premiums but do not increase with a change in your age each year. Level premiums are generally more affordable over the long term and will convert to stepped premiums at age 65.
Recently select insurers have begun offering a third premium type:
- With this paid for option, your premiums will begin on a stepped pattern but will convert to level premiums once the stepped premiums (Stepped premiums plus the paid for option) becomes more expensive then the level premium. These premiums will generally remain unaffected by age until 65, when they will convert back to stepped premiums as per normal level premium policy guidelines.
Please note that is a paid option and is not included in all policies that begin on stepped premiums. There may also be age restrictions on when this option can be selected.
6. Built in Benefits:
There are a number of built in policy options that insurers will include as part of your income protection policy. While the options may differ between insurers, some of the more common benefits include:
- Waiver of Premium
- Rehabilitation Expenses benefit
- Partial Disablement Benefit for certain occupation categories
- Specified Injury Benefit
7. Additional Policy Options
Insurers will generally offer a number of additional policy options at an extra cost. These options are designed to enhance your cover where you feel it may be needed. These options can differ between insurers but may include:
- Needlestick Cover
- Day 1 Accident Cover
- Increasing Claims Option
- Disablement Booster Payment Option
For more information, please see the policy options section of our website
8. Reading your PDS
It is essential for you to understand the policy Terms & Conditions before you decide on purchasing any policy. These can be found in your policy’s Product Disclosure Statement.
What other variables will affect my premiums?
Personal exertion income
– there are two definitions:
– the pre-tax remuneration paid by an employer which can include salary, fringe benefits as well as any superannuation contributions. Bonuses may also be included, depending on the f remuneration bonuses make up.
Self employed person
– Income generated by the business due to their personal exertion less the necessary incurred business expenses. Insurable Income – generally your pre-disability income.
These factors, along with the waiting and benefit periods, built in policy options you choose, and any additional cost policy options you select will generally determine the price of your premiums
Income Protection Premiums are generally tax deductible for individually owned policies; however any monthly benefits paid out to you will be taxed as per normal income and added to any regular earnings you have.
If you have a combined policy, please ensure that the income protection premiums are the premiums you are claiming a deduction on.
An alternative to Income Protection Insurance is Accident Insurance, which may be suitable for you if you are unable to take out income protection due to a medical condition or if you are unable to afford the premiums.
Accident Insurance covers you in the event that you suffer from an accident and you are unable to work. It pays you a lump sum benefit of up to 75% of your salary and is generally not medically underwritten, nor are you required to provide any medical history. As accident insurance only covers you for accidents, in order to claim, the insurer’s definition of an accident will need to be met before a claim can be made.
If you have any questions about income protection insurance or accident insurance please contact one our friendly staff on 1300 135 205.