Income protection insurance is one of those expenses that you only really think about when the unexpected happens. No matter how many precautions we may take, there are some things in life that are just beyond our control.
If you ever end up in a situation where you’re unable to work due to illness, injury or disability, income protection insurance could be a saving grace. Yet, does that mean you should get it? We’ve put together this short article with help from Ryan Watson, Financial Advisor and CEO at Tribeca Financial, to give you some insights into income protection insurance and choosing a good policy.
What does income protection insurance cover?
Income protection insurance can cover up to 85% of your pre-tax income in the event that you are injured, sick, or permanently or totally disabled and no longer able to work or earn an income. Generally, this income protection is for a set period of time that will depend on why you’re claiming and the nature of the illness, injury, or disability. Each policy will also have its own definition of what constitutes a total or partial disability, so be sure to always read the Product Disclosure Statement (PDS) to clarify this before signing up with a provider.
Unfortunately, income protection insurance doesn’t cover you in the event that you have been made redundant or unemployed. It is designed specifically to cover people who are physically unable to continue working, not someone who has simply lost their job, but is still capable of finding a new employer.
Deciding if you need income protection insurance
If you’re an avid player of sport, whether it be rugby, basketball or even cycling, you could be covered head-to-toe in safety gear, but this still wouldn’t guarantee your complete protection. This is why no matter your reason for being unable to work, it’s worthwhile to learn more about income protection insurance policy and how it can help you.
MoneySmart have outlined some important points to consider when it comes to deciding whether or not income protection insurance is right for you:
- You have significant financial commitments that you cannot meet because you are not receiving a working income. These could include things like a home loan, car loan or large personal loan.
- You’re self-employed or are a small business owner, and may not have sick leave or annual leave to utilise.
- You have family members, dependents or children who rely on the income you earn to survive.
- You don’t have enough savings to cover living costs or ongoing medical expenses in the event that you are sick or injured and unable to work for an extended period of time.
Ultimately, quality advice around assessing, advising, and then implementing an appropriate risk insurance policy is invaluable. At Oiyo, we’re not financial advisors. When looking into income protection insurance, you should always consider seeking independent financial advice from a qualified advisor.
Choosing a good income protection insurance provider
There are plenty of insurance providers out there offering income protection policies. Yet, that doesn’t necessarily mean all of them are going to be suitable for you and your unique needs. When doing your research on different providers, it’s important to conduct a thorough comparison by looking at what inclusions and exclusions different providers and their policies come with. You should also consider seeking some professional guidance.
Ryan’s two cents
The right client-centric advice will ensure that you choose the right insurance provider, with the right policy benefits, i.e. waiting period, benefit period and additional policy extras.
To get a better idea of what provider may be suitable for you, take a look at the following items you’ll likely find in an income protection PDS:
Your waiting period typically refers to the length of time you would need to wait before making a claim. Often it is a 30, 60 or 90 day period, following the date you take out your income protection insurance.
These would work similarly to private health care, where certain treatments or areas of cover require you to be a member for a set amount of time before you can claim from your healthcare insurance provider.
When it comes to policy types, you have a couple of different options to choose from.
Indemnity Value Policy: An indemnity value policy means you’re insured for a set percentage of the salary that you are earning when you make a claim. This means your insured amount has the potential to change, depending on what you’re earning. These types of policies are generally the cheaper option and can be a good option for people who know that they have a stable income.
Agreed Value Policy: An agreed value policy, on the other hand, means you are insured for a percentage of an agreed-upon amount that is specified when you sign up for the policy. This amount does not change even if the amount you’re earning does. While this policy is more on the expensive side, it can be a good choice for those who have less consistent income that changes from year to year.
The benefit period on income protection insurance is the length of time that your payments will last for. Most policies will allow you to choose a benefit period between two and five years, or up until a specific age (such as 65). As for the waiting period, the longer the benefit period, the more expensive the policy is likely to be.
There are two types of premiums that apply to income protection insurance:
Stepped Premiums: Stepped premiums are premiums that are re-calculated at each new policy renewal period. They tend to increase every year based on the higher chance of a claim as you age. These premium amounts start off at a lower amount but have larger annual increases.
Level Premiums: Level premiums are premiums that will start off at a higher amount at the beginning of your policy. However, because changes aren’t based on your age, the premium increases at a much slower rate than your stepped premiums.
Ryan’s two cents
Stepped premiums are generally a good place for people to start – they are more cost-effective and allow you to update your policy over time to suit your current day needs. Flexibility when it comes to Income Protection is a high priority because, as we know, life can throw us some curveballs, i.e. redundancy, etc.
These are just a few of the features you should look out for when comparing income protection insurance. What you prioritise in a policy will be unique to your circumstances and what you can comfortably afford. Take some time to figure out exactly what you want to be included in your personal policy, and look for a provider who can offer you the type of policy that will work best for you and what you’re looking for.
What information will your provider need?
In order to determine what policy is right for you and what your premiums are going to be, your potential provider will require some personal information about you first. This information helps better personalise the policy and tailor it to you. Providers will need to know the following:
- Your Age: The older you are, the higher your premiums are likely to be as the chances of you claiming are more likely
- Gender: Some insurance providers claim women are more prone to having time off work, due to reasons such as pregnancy and possible complications.
- Occupation: If you have a dangerous or high-risk job, your premiums are likely to be higher as accidents are more likely.
- Medical history and any pre-existing conditions: The healthier you are, the lower your premiums are going to be. Pre-existing conditions may push your premiums up as you’re more likely to make a claim on your policy and this can be seen as a financial risk to the insurance provider.
- Lifestyle choices: Activities such as high levels of drinking or smoking, which can lead to serious illness, injury or accidents can push your premiums up a significant amount.
Ryan’s top tip
Please keep in mind that whilst the underwriting process to take out an Income Protection policy is comprehensive and can take some time, it does provide you with guarantee cover for the rest of your normal working life. Hence, why your chosen insurer has to complete such a comprehensive understanding of your health history to date.
What about my superannuation income protection insurance?
Your superannuation policy may have already come with income protection built-in – easy to apply for, quick and possibly no extra premiums. While this is definitely convenient, it may not necessarily be the right decision for you. There are a few things to take note of before choosing to rely on the policy that may be provided by your superannuation:
- While it may feel like you’re not actually paying for income protection insurance, it’s important to know that the premiums are coming directly from your superannuation. This can end up costing you more money in the long run as it is reducing the amount in your superannuation and you’ll lose out on the compound interest later on. As a result, this could end up being a decent chunk of change.
- Income protection insurance through your superannuation provider is generally not as comprehensive as it would be through a specialised provider. It is often a basic level policy that is not tailored to your specific needs.
- You also do not have the option of choosing your policy or what it covers. This is all chosen and provided by your super company. As a result, you may miss out on features that are beneficial to you in the future, potentially causing long wait times, low levels of cover, short benefit periods, etc.
- Income protection insurance premiums are tax-deductible. If you decide to use your super income protection policy, you cannot claim these deductions during tax time.
- It is generally more difficult to make a claim for income protection insurance through your superannuation. This is because you can’t go directly to the provider, as it is up to the fund’s trustee to decide whether you meet the temporary incapacity criteria before any claims are approved and you receive the benefit.
Wait, what if I’m self-employed?
If you’re self-employed, income protection insurance may be worth considering to ensure you’re able to meet your financial obligations if you’re no longer able to work in the future. While there’s no denying being self-employed and your own boss feels incredibly freeing, it also comes with a lot of responsibilities and unpredictability. Unfortunately, being self-employed means you carry more risk than your average worker if something were to happen to you. Put simply, if you’re unable to work, your business could suffer greatly which will likely affect your ability to meet your financial responsibilities
Many people who are self-employed don’t always have the luxury of sick leave or annual leave to fall back on. This makes income protection insurance that much more important. In the event that you are unable to work for a period of time, there’s no denying you will need something to protect you. If you have a fluctuating income, you may be able to find policies that can be tailored to your personal financial situation and needs.
Do you need income protection insurance?
Don’t worry, we know. Taking out income protection insurance feels like a pretty big adult-like decision.
If you aren’t too sure whether you need it or not, sit down with your financial advisor and have a look at how you would fare financially if you were unable to earn an income for an extended period of time. If you have enough savings in the bank to get by comfortably and meet all your financial obligations, you may not even need to ‘splurge’ on income protection insurance.
However, if you have dependents and family members who rely on your income to get by, or you would be unable to keep up with your bills and expenses if you were out of work for a while, income protection insurance may definitely be worth investing in.
While you may have the option of using the policy that is already attached to your superannuation, this level of cover may not always be suitable for you. That’s why we highly suggest taking the time to check out what the policy attached to your super covers and whether you would be better off investing in your own insurance policy. It may not seem like it now, but investing in income protection insurance now could be the saving grace that you need in the future, if something were to happen making you unable to work for an extended period of time.
Ryan’s final advice
People often forget or disregard insuring their greatest personal asset, their ability to earn an income. If you wouldn’t travel overseas without travel insurance, you certainly shouldn’t be without a comprehensive income protection insurance policy.
Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.
Contributions from Ryan Watson
This article features contributions from Ryan Watson, Financial Advisor and CEO of Tribeca Financial. With over 15 years experience in the finance industry, Ryan’s passion for financial planning came from a desire to assist others in creating wealth for themselves. Tribeca’s focus is not just about improving its clients’ finances but helping them to build the life they truly want.