Getting sick is hard enough, without worrying about your finances. As your ability to earn an income is one of your greatest assets it makes sense to protect it. This is where income protection insurance can help as it insures you against loss of earnings through injury or illness.
Before you choose an income protection policy, it’s important that you understand what exactly you’re signing up for to determine whether the policy is right for you.
There are different types of income protection policies to choose from. To find the right policy that meets your requirements, you might want to talk with a financial adviser and let them help you look for various options from some of Australia’s major brands. A financial adviser can help you set up the right policy for your unique circumstances.
What is an Income Protection Policy
An income protection policy pays you a monthly benefit, generally up to 70% of your pre-claim income, should you become ill or injured and cannot work for longer than your waiting period. The monthly benefit provides you with the ability to continue paying your monthly bills, so you can focus on recovery and return to work.
The right income protection policy must match your:
- Personal requirements
- Budget and preferred method of payment
- Desired policy ownership structure
- Choice of additional options
Income Protection Policy Options
There are a variety of options you can add to your policy to better tailor your income protection for your specific requirements. Please note that this is a general list and does not include all options offered by each life insurance company.
- Total disablement booster payment
The Total Disablement Booster Payment allows your monthly benefit to increase beyond 70% of your salary if you suffer from a total and permanent disability. It is generally an additional option, however, a number of insurers have started offering it as a built-in benefit. In most cases, this benefit is for the first 6 months of a claim.
How does the booster payment work?
Normal income protection policies cover up to 70 per cent of your salary if you suffer a sickness or injury and are unable to work. The booster payment option allows for this monthly benefit to be increased to almost 100 per cent of your monthly salary if you suffer a total and permanent disability.
Insurers may require you to be assessed by a medical practitioner and for you to be re-assessed on an ongoing basis.
Please note that select insurers may place a limit on the amount of time you can receive the booster payment, with some only paying it for the first 3 months while others may limit it to 24 months.
2. Increasing claims
Allows your monthly benefit to increase while you are on a claim. You can choose to increase your monthly benefit by either the annual Consumer Price Index (CPI) or by a pre-determined percentage as outlined in your PDS. This option is generally more suited to policies with a benefit period longer than 2 years.
3. Bed Confinement
The bed confinement option provides you with an additional payment if, due to a sickness or accident, you are confined to a bed or need to be near a bed for at least 3 consecutive days during your waiting period.
You will generally receive 1/30th of your monthly benefit for each day of bed confinement, until the end of your waiting period.
4. Plus vs Standard Policies
Insurers will typically offer a Standard and Plus income protection policy option. The Plus option generally offers more benefits at a slightly higher premium, for example:
- Bed confinement benefit
- Accommodation benefit
- Child care benefit
- Family care benefit
- Rehabilitation benefit
The above options can be chosen separately or might be part of the Plus policy option. It’s best to review the relevant PDS for more details before considering which option to choose.
Income protection policy ownership options
Another very important decision you should consider before comparing policies is how you want to structure your income protection insurance, meaning who will pay for your policy and who owns it.
Usually, income protection insurance can be owned by either yourself, the insured individual, or by your Superfund. In some cases a policy can also be owned by a company, usually when a business takes out keyman insurance.
Self-owned vs Owned by Super
Whom you choose to own your policy will impact who has control over it, meaning the policy owner can make changes to the policy, but the owner is also responsible for paying the premiums.
- Self-owned income protection: The life insured owns the policy and pays the premiums. When the income protection policy is owned by you, you can claim the tax deductions.
- Superannuation-owned: Taking out income protection through your super fund allows for your premiums to be paid by your fund, which could help with short-term cash flow problems. However, it might reduce your retirement savings and the fund will receive the tax deductions, not the insured individual. Gaining access to the monthly benefit can be more complex as you need to meet both the policy eligibility criteria as well as an SIS condition of release.
Select insurers will also offer you the opportunity to split your income protection between self-ownership and fund ownership, this is called Split Income Protection. When structuring your policy in this way, you’ll benefit from both self-owned and super-owned options.
Is it possible to have two income protection policies?
Yes, generally you can have two income protection policies. However, they should differ in the waiting period and benefit period. Because you can usually only be insured for up to 70% of your income, claiming on multiple income protection policies should not leave you better off financially than if you were able to keep working.
For example, you might have one policy that has a 30-day waiting period, but only a 2-year benefit period, and another policy with a two-year waiting period that pays out a monthly benefit until your age 65.
You need to fully disclose all your existing policies to every subsequent insurer so that the underwriter has all the information needed when assessing your application and whether it’s financially justifiable for you to have multiple income protection policies.
The cost of income protection premiums
The cost of an Income Protection premium depends on many factors, including your occupation, age, amount of coverage you want, general health conditions (including whether you smoke), the insurance company’s definition of disability, and your health. Affected. A time of waiting and a favour.
Choice of income protection premium type
The cost of your premiums will also be affected by your choice of premium structure: Stepped, level or hybrid premiums.
1. Stepped premiums
They are cheaper in the short term as they start off more affordable but increase every year as you age. When you become older, you are generally more likely to claim.
- Level premiums
More affordable in the long term as premiums are based on your entry age, but they start off more expensive.
3. Hybrid premiums
Also known as Optimum premium, is a mix between stepped and level premiums and is only available from select insurers. Your policy converts from stepped premiums to level-type premiums when your stepped premiums reach a pre-determined price, which is higher than the level premiums would have been.
It is still best for you to talk with a financial adviser of your choice that could help you plan and decide the best policy for you.