A Simple Guide to Income Protection | Is It Right for You?

Income Protection

If you can't work due to sickness or injury, paying your regular bills can get tricky. Learn more about different income protection options and what is available to you.

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The Ins and Outs of Income Protection

The Ins and Outs of Income Protection

If you’re anything like us, you’re probably always planning ahead for unforeseen events in life. After all, who knows what’s around the next corner? We’re firm believers that it’s better to be well prepared for life’s little surprises. So it comes as no surprise that you’ve considered income protection insurance and how it can help you if you’re unable to work for whatever reason. 

If you’ve just started your journey into income protection and want to know what it’s all about, Oiyo can help you out. We’ve got all the information to make your research a breeze. Take a look here.

What is income protection? 

Income protection is a type of insurance that can pay up to 85% of the policyholder’s income for a specific length of time if something happens to them and they are unable to work due to sickness or injury or partial or total disability. Each policy will be different as they are based on the policyholder and their personal income details. Each provider will also have their own definition of what partial or total disability, sickness and injury means so be sure to confirm this before committing to the policy.

Income protection is designed to help you cover your bills and expenses if something were to happen and you become sick or injured. It can give you peace of mind knowing that you’re covered if you have to take unexpected time off work. 

What does income protection insurance cover? 

In a nutshell, income protection insurance covers a percentage of your income or wages if you are unable to work. This can be a huge relief factor for many as you won’t have to worry about paying your bills and expenses if something were to happen and you ended up in hospital or temporarily unable to work. Your income protection insurance ensures that you would still get a regular wage and would be able to keep up to date with your daily expenses. It’s basically a replacement for your normal wages until you are able to go back to work, or for a set period of time (whichever is organised with your provider).

What to look out for in your income protection policy 

When you’re doing your research on different providers, it’s important to conduct a thorough comparison to make sure you’re getting the best cover for you. Keep the following things in mind when browsing through your options: 

Waiting periods 

This refers to the length of time that you need to be off work before your payments start. The shorter waiting period the better as you may not be able to receive payments for quite a while after you’ve stopped working. Generally, the longer the waiting period, the cheaper the policy will be. Most income policies have waiting periods that range between 14-days and 2-years. 

Level of cover

The actual amount that you could receive if you are unable to work. Typically, the higher your level of cover, the more expensive your policy will be initially.

An affordable insurance premium

This is the amount of money you will pay for your insurance policy. There are generally said to be two types of premiums for income protection insurance. These are stepped premiums and level premiums. Stepped premiums are calculated at each renewal. Whereas level premiums charge a higher cost at the start of your policy, but because they are not based on age, they increase at a much slower rate than stepped premiums. We’ll go over both of these premiums in more detail, down below.

Recurring disability benefit

When you have to claim for the same injury or illness multiple times. This can happen if an injury or illness comes back down the track.

The benefit period

This is how long the monthly payment will last for. The longer the better as you’ll want to be able to claim benefits for as long as possible if you need them. Similar to the waiting period, the longer the benefit period, the more you can expect to pay for your policy. Benefit periods tend to range from 2 to 5 years. 

Specified injury or illness benefit clauses

This is a pre-set benefit that is paid for a pre-set number of months if you end up with any of the specified injuries or illnesses that are included in this clause. Generally, you would not need to serve out the waiting period for these – they’re automatic! 

Pre-existing conditions and exclusions

Some providers may exclude you if you have pre-existing conditions that could affect your work so be sure to check

What isn’t covered in your policy? 

Different income protection insurance providers are going to have different exclusions so it’s important to double-check these when you’re doing your comparison. As a general example, some providers could exclude certain diseases such as cancer, while others might exclude injuries sustained from high-risk activities like adventure sports. Others will have pre-existing conditions that they will not cover. 

It’s important to note that redundancy is generally not included in your income protection insurance policy either. Some providers, however, do offer redundancy insurance as an add-on to their income protection policies. If you do opt to add it on, you’ll have certain criteria that you will need to meet before you’re able to claim on it. We’ll explain more below.

What about superannuation income protection? 

Many people choose to get income protection insurance through their superannuation funds as it’s quick and easy. While it is undoubtedly convenient, there are a few things you should be aware of before deciding if it’s for you. 

  • Income protection cover through your superannuation won’t be as comprehensive as it is through a specialised provider.
  • It may feel like it’s not costing you anything, but having your insurance through your superannuation can actually end up costing you money in the long run as it is reducing the money you have in your superannuation account and you’ll be losing out on the compound interest later on. Basically said, the more money you leave in your super now the better.
  • Income protection insurance is tax-deductible and you can add it to your tax return every year. You can’t do this if it’s through your superannuation.
  • You won’t get to pick the policy. You have to go with whatever your super provider provides you with. This could mean you’re allocated a policy that doesn’t suit you and your individual circumstances (e.g long wait times, low benefit amounts).  

Different types of policies 

There are a couple of different options for you to choose from when it comes to income protection insurance. These policy types will have the most effect on the premiums that you pay so it is important to know the difference before you commit to either of them. Your options are:

An agreed value policy

This type of policy means that you are insured for a percentage of an agreed-upon amount when you initially sign up with your provider. This amount does not change, regardless of whether your income goes up or down after you sign up. This type of policy is generally a little more on the expensive side but is fantastic if you have income that may change every year.

An indemnity value policy 

This type of policy basically means that you’re insured for a percentage of your salary when you make a claim. If your salary has decreased since you signed up with your policy then you’ll get a small amount paid to you as your insurance payment. If you know that your salary is going to stay fairly stable and you’re not expecting any salary cuts then this is a great option as it is on the cheaper side. 

What are the differences in premium types? 

Premiums can sometimes be a little bit confusing. They’re usually based on a lot of different things like income level, possible pre-existing health conditions, level of insurance required, just to name a few. With income protection insurance, providers have made it easy for you to choose the best way to pay for your premiums. You generally have a choice of:

Stepped premiums 

These are premiums that are re-calculated with every new policy renewal date, usually yearly. As a general rule of thumb, you can expect these premium amounts to increase regularly as the chances of you claiming on your policy become higher as you age. These increases are designed to offset this higher chance of claiming. With this in mind, your premium amounts will generally start off at a relatively cheap rate.

Level premiums 

Level premiums are premiums that are less likely to change throughout the life of your policy. This type of premium payment will start off at a higher rate, but due to the fact that changes aren’t based on your age, they’ll increase at a much slower rate than your stepped premiums.  

Does income protection also cover redundancy? 

While standard income protection insurance doesn’t technically cover you in the case of redundancy, some providers do offer redundancy cover as an optional extra. Redundancy cover comes in handy if you find yourself out of a job for the short term and need some financial assistance to get you by. Redundancy cover is a great extra if you’re worried about potentially losing our job in the future and know you’ll need help meeting your financial responsibilities.

Just remember that redundancy cover only covers you for involuntary redundancy or job loss, you won’t be covered if you quit your job or resign. Many providers will have specific criteria or definitions of involuntary redundancy so be sure to check these out. In general, they can look something like the following:

  • If you’re let go from a job that has been paying you a salary of some kind;
  • If your contract is terminated by your employer early;
  • If you’re self-employed and your business has ceased trading because you can no longer meet your financial responsibilities.

Who should get income protection insurance? 

Income protection insurance is an insurance that will appeal to some, while others will decide that they don’t need it. If you’re wondering whether it would be a good option for you but you’re not sure, there are a few things you can think about to help you make your decision. 

  • Do you have family or dependents that rely on the income you earn?
  • Are you self-employed and don’t have access to sickness or annual leave?
  • Do you have significant debts that you will need to keep making payments on, even if you’re unable to work? 
  • Will your family or friends be able to help you out if you do lose your income?
  • Do you have access to any other way to pay for life’s expenses and support yourself if you temporarily or permanently lose your income? 

These are the kinds of questions you need to be asking yourself to help you make an informed decision on whether or not you need income protection insurance.

Is income protection insurance worth it? 

Income protection insurance could be worth it if you have bills and expenses that you will need to keep paying if you’re unable to work and/or you have family and dependents that rely on your income. Knowing that you have that added protection to your income if you’re unable to work can give you peace of mind knowing you’ll be covered. The last thing anyone needs when they’re unable to work is the worry of how they’re going to pay their bills, put food on the table or support their dependents. Income protection is your assurance against this uncertainty. 

It may seem like just an added expense that you may never even utilise, but it really could be a saving grace. You never know when you’re going to become seriously ill or fall prey to an injury that means you can’t work for an extended period of time. In this day and age, having income protection cover means that you can focus on recovering and getting back to work.

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