On Income Protection Insurance
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Policy Options
There are a range of policy options to consider when selecting income protection insurance. Generally insurers offer three types of policies:
Indemnity Value
With the indemnity value income protection policy, your monthly benefit will constitute the lesser of 75% (or a similar proportion) of your pre-claim income, or a predetermined monthly benefit.
As this option is not financially underwritten at the time of application, you are required to prove your pre-claim income at claim time. This means that the value of your monthly benefit is subject to any decrease in income earned between application and claim time.
The pre-claim income is generally income earned over the 12 months prior to claim time.
Advantage:- Generally the most affordable
- Should your income decrease between application and claim time, your monthly benefit will also decrease.
Agreed Value
An agreed value income protection insurance contract sets in stone your monthly benefit at the time of application, rather than at claim time. The value of your monthly benefit is based on income earned prior to application and hence is not subject to any changes in income between application and claim time.
Advantage:
- The insurer can not reduce your monthly benefit should your income decrease between application and claim time.
- If your income is very secure you may be unnecessarily paying extra for this type of policy.
Guaranteed or Endorsed Value
The guaranteed or endorsed value option is essentially the same as the agreed value option, except that you are required to provide evidence of your income at time of application, rather than at claim time.
Advantages:- Guaranteed value of your monthly benefit to be paid upon claim time
- Faster administration of claim
- Prevents overinsurance, as underwriters have already assessed the financial evidence, and ascertained the amount can be insured.
- If your income is very secure you may be unnecessarily paying extra for this type of policy.
Additional Policy Options (normally at an additional cost)
Once you choose one of the above types of policies, insurance companies will generally offer, at extra cost, a range of additional policy options designed for specific circumstances, including:
Total Disablement Booster Payment Option
A relatively new development in income protection policy options, the Total Disablement Booster Option can add an extra 1/3 to your monthly income protection payments should you be made totally and permanently disabled.
Increasing Claim Option
Once on claim, this option ensures your benefit is adjusted to keep up with inflation. Your monthly benefit will generally be increased a year after the date you claimed your benefit, accounting for inflation experienced during this time. This increases every year while on claim and is usually adjusted to the Consumer Price Index (CPI) or 3%.
Accident Option
If an accident renders you completely unable to work for a given time period, this option allows you to claim your monthly payments at a much sooner date. Generally, you can claim your benefit after just three days into your waiting period.
Critical Illness Option
If you experience critical illness as defined in the product disclosure statement, this option usually entitles you to a lump sum payment at least six times your monthly benefit.
Mental Health Discount Option
If you elect this option, you are entitled to a premium discount on the proviso that if you make a mental health claim, your monthly payout benefit will generally be limited to 24 months only and not your full benefit period.
If you have any questions or if there are any other income protection policy options you would like to discuss, please contact one of our advisers on 1300 882 762.
