What would happen to your expenses and lifestyle if you are unable to work for an extended period of time due to an illness or injury? After sick leave provisions and any accrued leave you may have within your employment have been exhausted, you may find that you cannot cover your ongoing expenses.We tend to take for granted our ability to work and earn an income, and do not consider the prospect of being unable to do so. However, losing your income could have devastating effects on your future plans and financial security.Income protection insurance provides you with a portion of your employment income for a specified period of time or until you are able to return to employment (subject to conditions).
What is Income Protection Insurance?
Income protection insurance provides a regular (usually monthly) payment if the insured person is temporarily disabled due to illness or injury. Most policies will allow the person to insure themselves for up to 75% of their gross income.
A monthly benefit is paid to the owner of the policy for the length of the benefit period if the insured person is still disabled after their waiting period has expired.
An income protection insurance benefit may be used to pay:
for food, and day-to-day expenses
rent or home maintenance costs
mortgage repayments or other debt repayments, and
any transport or medical costs.
Most income protection policies also include additional benefits at no extra cost and some optional benefits which incur additional cost. Some of the included benefits may be:
a recurring disability benefit
an elective surgery benefit
a specific injury benefit (guaranteed payment period when the insured suffers a specific injury), and
a death benefit.
Optional benefits may be:
an accommodation benefit (pays a benefit if the insured is hospitalised far from home to cover the cost of accommodation of an immediate family member to be near them)
a bed confinement benefit
a crisis benefit (pays over a guaranteed payment period if the insured suffer a serious medical condition)
a family assistance benefit (pays an amount to compensate for nursing care or a family member ceasing work to take care of the insured), and
day 1 accident benefits.
Waiver of premium benefit. The policy may also include a benefit which waives the premiums payable whilst the insured person is unable to work.
Monthly benefit: The monthly benefit refers to the amount of benefit the insurance provider pays each month when the insured person is temporarily incapacitated. The monthly benefit payable may be based on an:
agreed value, or
Agreed value: An agreed value monthly benefit means that the insurer will pay a monthly payment equal to the amount the insured person applies for in their policy, which may be limited to 75% of their income when they apply for the policy. The insurer will still pay this amount even if their income changes before they become disabled. In addition, insurers may offer automatic indexation of benefits each year in line with the Consumer Price Index (CPI). Example: In July 2012 Josie applied for an income protection policy with ABC insurers. At the time of application her annual salary was $60,000. Therefore, ABC insurers agreed to cover her for a monthly benefit of $3,750 with an agreed value. This represents 75% of her income. In January 2012 Josie decided to reduce her hours of work and her income reduced to $40,000 per annum. In July 2012, Josie made a claim under her policy as she was temporarily incapacitated and could not work. ABC insurers paid her a monthly benefit of $3,750 even though this was equal to more than 75% of her income at the time of her claim.
Indemnity contract: An indemnity contract means that the insurer will pay a monthly benefit based on an assessment of the insured person’s average income for the previous twelve months before they claim. With an indemnity contract the policy holder should regularly review their level of insurance with their income amount. If they do not update their insured amount with changes in their income, they may pay premiums for a higher monthly benefit but receive a lower monthly benefit at the time of claim.
Waiting period: The waiting period is the period of time the insured person must be unable to work, before the benefit is payable. Waiting periods offered by insurers usually range from fourteen days to 2 years, although this varies between insurers. Generally benefits are paid in arrears, eg. the first payment for a 30 day waiting period may be 60 days after the first consultation with a doctor.
Benefit period: The benefit period is the maximum period the insurance provider will pay a benefit for a single claim. Benefit periods are usually offered from 2 years up to age 65.
Am I Eligible for Income Protection Insurance?
You are only eligible if you are employed (including self-employed). Premiums are fully tax deductible.
How are my premiums calculated and what can affect the premiums I pay?
Like life insurance, premiums are based on factors such as your age, medical history, and smoking habits. However, they are also substantially influenced by the type of employment you are involved in. For example, a coal miner would have a higher risk of being injured while at work in comparison to an office worker who stays indoors most of the day.
Another factor affecting the premiums is the waiting period and benefit period selected on the policy. The waiting period refers to the length of time you are unable to work before benefits are paid. For example, if you believe that you would survive without employment income for one month, you may require a policy with a waiting period of one month or more. Most policies offer waiting periods from 14 days up to two years. The waiting period you chose will depend on your personal situation including how much leave you have owing at work and the level of liquid funds you may have. The shorter the waiting period, the higher the premium. The benefit period is the length of time you will receive a benefit payment. It can range from one year to up to age 65 (both the waiting and benefit periods will depend on the insurance provider and the premiums you pay). Again, the benefit period you select will depend on your personal situation.
You can mix and match different policies to ensure that you are fully covered. For example, if you have an existing income protection policy within your employer superannuation fund that has a benefit period of two years, you may then obtain an additional income protection policy that has a waiting period of two years and a benefit period of up to age 65.
How do I get a Quote?
At Two Mile Bay we have access to 12 different insurers.
Income Protection Insurance
Income Protection provides a regular (usually monthly) payment if you are temporarily disabled due to illness or injury. Most policies will allow you to insure upto 80% of your gross income.