Everything You Need to Know About Income Protection Insurance

If life and work are ticking along, you’ll be so focused on your business that the last thing you’ll be thinking about is what would happen if you couldn’t work.

However, the best time to think about the spectre of illness or injury, is while you are healthy. The healthier you are, the cheaper insurance premiums are going to be.

But do you even need insurance? Let’s look at income protection, how it works and whether you should get it.

What is income protection insurance?

Income protection insurance, can help you manage your expenses if you are unable to work for a certain amount of time if you are sick or injured.

When purchasing income protection, consider what other types of life insurance you might need as well, such as life cover and total and permanent disability cover.

Income protection gives you a steady source of cash in case you get injured or sick and cannot work.

This means you can focus on getting better instead of how you’re going to pay the bills.

Income protection insures you for a set level of income, and will pay you until you can return to work or for the agreed period – whichever is sooner.

What does income protection insurance cover?

Income Protection cover is available for up to 75% of your monthly income to provide an affordable level of financial protection should you fall ill or be injured.

It is issued by life insurance companies and the insurer can’t cancel the policy as long as the policyholder continues to pay their premiums. The provider also can’t adjust the terms of the policy once you have taken it out.

Income protection:

1. helps you cover your debts and expenses while you’re out of work.
2. provides peace of mind and financial protection for you and your family.

How is income protection different from life insurance?

Life and income cover offer protection for different reasons and both are worth considering. Life cover provides a lump sum benefit in the event you pass away or suffer a terminal illness. Income protection provides an ongoing monthly benefit while you are unable to work for an extended period.

How is it different to Work Cover?

WorkCover is a nationwide initiative where all employers pay the government a premium in case one of their employees is injured at work. The employer can then make a claim and WorkCover will pay out compensation and other benefits, but only if the injury occurred at work.

Do you really need income protection insurance?

Income protection insurance replaces income lost through your inability to work due to injury or sickness.

It is especially suitable for self-employed people, small business owners or professionals whose business relies heavily on their ability to work.

If you’re dependant on your income for your livelihood (like rent, mortgage, groceries, and bills) then it’s worth considering income protection.

The benefits of income protection insurance

• Peace of mind. You don’t have to worry about your finances if an injury or sickness keeps you out of work.
• Financial security. Keep on top of mortgage repayments, rent and bills.
• Freedom. When you don’t have to worry about money and making ends meet, you can relax and recover quicker.
• Protection against the unexpected. Accidents and illness don’t just happen to other people. Income protection insurance guarantees that you’re prepared for the future, whatever happens.
• Safety net. Income protection is essential protection for your kids and quality of life, especially if you are self-employed.

How does income insurance work?

Each income protection policy has its own definition of disability and range of benefits.

• Income protection usually offers cover for up to 75% of your gross wages for a maximum time period (e.g. 2 years or to age 60).
• You pay premiums which vary according to a number of factors
• Premiums may be stepped or level
• Policies have waiting periods. Take into account your leave balances (e.g. annual, sick and long service leave) and access to emergency cash when choosing your time period.
• You need to tell the insurer anything that could affect their decision to insure you when you apply. Some insurance companies need you to give them details of your medical history.

Many super funds offer income protection. To see what cover is available:

• contact your super fund by phone or through their website
• check your member statement
• speak to a financial planner or insurance agent who specialise in income protection
• read your product disclosure statement (PDS).

What does it cost?

Premiums are the amount you pay for your policy per month.

The cost is influenced by a number of factors, including age, gender, smoking status, and occupation. More manual occupations generally have a greater risk of illness or injury so premiums are more expensive for such occupations. For example, premiums can vary from around $40 a month for a 27 year old non smoking male accountant to $626 for a 52 year old non smoking female commercial cleaner.

Income protection is more expensive for females because women are more likely to claim than men, and are more likely to remain off work for a longer period of time.

Premiums can be stepped or level. A level premium stays the same over time whereas a stepped premium is cheaper initially, but gets more expensive over time.

Income protection insurance premiums are generally 100% tax deductible, although not if through your Super fund. Check with your accountant or a certified tax specialist to assess whether the policy you want to go for will be tax deductible.

When will you receive benefits?

You will not receive benefit payments immediately. The waiting period is the number of days you have to wait before payments begin, and are typically between 30 and 90 days.

If you’re involved in an accident, the waiting period usually begins on the day your injury occurs, while policyholders who fall ill, will begin their waiting period on the day their sickness is diagnosed.

Exactly which waiting period is right for you will be determined by how long you think you could manage financially without your regular stream of income.

How long will you receive benefits?

The benefit period defines the maximum length of time you’ll receive payments.

Benefit periods are typically two or five years.

You can also choose to receive payments up until a certain age (usually 65).

Agreed value policy

Agreed value cover is more expensive and lets you set your own benefit amount.

It’s a great option for people with fluctuating income who don’t receive a stable salary, such as those who are self employed.

Indemnity value policy

Indemnity value is cheaper. It sets your benefit amounts based on your income at the time of a claim.

If you’re on a stable monthly salary, this is probably fine.

Need to know

• When researching policies, ask: What’s covered? What’s not covered? How much will I receive after a claim? What will premiums cost?
• Consider getting a policy with index-linked premiums and cover so you know it will keep up with inflation.
• Consider a non-cancellable policy, otherwise companies may reassess your health or other factors on each renewal, possibly raising your premiums or refusing to continue cover.
• Look for a policy with Guaranteed Future Insurability. This allows you to increase your level of cover and is important if your circumstances change (e.g you buy a home or have a child.)
• Offset clauses allow insurers to reduce payouts if you have other income (for example, sick pay or Centrelink benefits). Check the policy for details.
• For insurance provided through super, the agreement is between the fund trustee and insurer. This may make the claim and payout process lengthier and more complicated. Check the waiting period and the benefit period carefully.

Getting a quote

You can get quotes online but we always recommend speaking to a financial planner or insurance agent who specialises in income protection.  When arranging a quote you will need to provide:

• Your name
• Gender
• Phone number and/or email
• Age or date of birth
• Your smoking status
• Occupation
• The type of cover that you are looking to get a quote or apply for
• Your current annual salary (for income protection application)
• Any pre-existing medical condition

AlA financial planner, such as Accountplan’s Dion Richardson, who can look at all the policies on offer and choose the one best suited to you.

You can also ask your Super fund about taking out cover through your superannuation. Income protection cover through your superannuation fund is generally cheaper than a standalone policy, but doesn’t offer as much choice and flexibility as other insurance providers.

Making a claim

If you need to make a claim on your income protection policy, you will have to provide evidence of your illness or injury. Ask your insurer exactly what they need so your claim gets processed as quickly as possible.

The income protection payments you receive will be for the period you are unable to work, in line with the policy.

You will likely need to provide:

• Your policy number
• The date your symptoms or health problem started
• When you stopped working
• Any medical forms from your doctor
• If relevant, copies of medical tests
• A Medicare authority form so that your insurer can gain access to medical forms and information.

Will a claim be paid?

In order to qualify for an income protection benefit, your insurer needs to be satisfied that you are disabled and unable to work.

But there isn’t a single definition of ‘disability’ across all Australian income protection policies. Instead, there are three different definitions that insurers use to assess degrees of disability:

Duties-based disability. This is the most commonly used definition of disability. If it applies to your income protection policy, you will qualify for the full benefit amount if your injury or illness prevents you from performing the income-producing duties of your occupation. If you are able to perform some, but not all, of the income-producing duties associated with your occupation, you may be eligible for a partial benefit.

Hours-based disability. Under an hours-based definition, you will qualify for a full income protection benefit if you are unable to work in your own occupation for at least 10 hours per week. If your working hours are reduced by illness or injury, but you are still able to perform more than 10 hours a week in your usual occupation, your policy may pay out a reduced benefit.

Income-based disability. If an income-based disability definition applies to your policy, your insurer will classify you as disabled if illness or injury has led to a reduction in your income by 20% or more. However, if you are still able to work and earn some income, you will receive a reduced benefit amount.

Before you apply for a policy, make sure you’re aware of how the insurer defines disability and what conditions you will need to meet to qualify for monthly income protection benefits.

Frequently asked questions about income protection

Should I use an adviser or buy directly from an insurer?

If you choose to use a financial adviser (ie: Financial Planner or Insurance Agent), they can compare the market for you, finding the widest range of options. They can also help tailor the policy to your needs, explain it all to you and walk you through the application process. Of course, they will take a fee and some time.

If you want to buy income protection insurance directly from an insurance company, use a comparison website to shop around for policies. Most insurers can provide a quote via their website or by phone. If you’re doing it on your own, make sure you declare all pre-existing conditions and read the fine print to avoid being rejected if you make a claim.

Should I get cover through super?

If you get income protection through your super, the benefit is paid through the super funds you have accumulated, so there are no up-front expenses. However, you don’t tend to have as much choice with policies offered through super. There’s often little or no choice of waiting period, benefit period or definition of occupation. The other down-side is that if you change super funds, you’ll lose your cover. It will also be eating up your retirement funds, however, if it’s difficult for you to pay premiums, it’s a cheaper option to pay through super.

Can I get long-term cover?

Income protection is designed for temporary relief, but you can get policies that last for 5 years of up to 65 years of age. It’s easier to qualify for these policies when you’re younger. When shopping for policies, look at the maximum benefit period. Of course the longer you want to be covered, the more expensive the premium. You need to balance out the features you need from a policy with what you can sustainably afford over time.

What is day one accident cover?

Day 1 accident cover is an option which allows you to access benefits early. This form of cover gives you protection in case you need money during the initial waiting period. It’s an option on some policies, so check the individual policy and insurer. This feature can also be called ‘Accidental Injury Option’, ‘Accident Benefit Option’ or ‘Day Four Accident’.

Can I apply for cover if I am already ill or injured?

No, you can’t apply for a policy to cover your current situation. However, you could apply for income protection insurance for future illness or injury, although insurers might define your current condition as a pre-existing condition which will mean higher premiums. It will all depend on the nature of your current situation.

What is ‘the minimum working hours required to receive cover’?

‘Minimum working hours required to receive cover’ is a common condition in policies. It defines your obligations in terms of hours you need to work each week in order to be eligible for cover.

Is income protection insurance relevant for you?

If you’re healthy, it’s time to take out income protection!

Income protection is important if you have children, are planning on having children, or have other family depending on your income. It’s particularly relevant if you are self employed. Small business owners may have other types of insurance to consider to protect their business.

If you are considering a policy, decide whether you want it through your super or not. Specify the terms you are after, especially with regards to waiting and benefit periods, and shop for the best rates. Balance out the features of a policy with what you can afford to pay. There’s no point getting extensive cover if you can only afford the premiums for a few months!

If you are about to decide on a policy, make sure you read the fine print and consider how any other relevant payments, like Centrelink, or your tax situation will be affected.

Be mindful that if you are self employed, a small business owner, have dependents and/or are the primary income earner in your family, it would be wise to take out Life Insurance too.

And PLEASE strongly consider using the services of a financial planner or specialist insurance agent.

Source: Quickbooks

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