What you need to know about income protection insurance and its benefit to you
15 Apr 2015
What if something happened yesterday that stopped you from going to work today? What if that event meant that you couldn't work for several months or years? Could you or your family cope financially?
The benefit of income protection insurance, also known as salary continuance, is that it covers your most important asset, your ability to earn a regular income. Income protection premiums are tax deductible and benefits typically cover 75% of your gross income for a specified period of time, usually two to five years, or even up to age 65.
This type of policy provides a monthly income in the event you suffer a major illness or injury that prevents you from working. It can relieve the stress and strain associated with not having an income to pay the mortgage and household expenses.
How much will you be paid
The amount of benefit that you may be paid is dependent upon your pre-disability earnings. Insurers can have specific definitions and it is worth noting whether they include superannuation and income such as ongoing bonuses, commissions and fringe benefits.
What's the cost?
The cost of premiums is dependent upon a number of factors including whether you select agreed value or indemnity cover, whether premiums are stepped or level and the waiting period that is selected.
Agreed value policies state that the monthly benefit cannot be reduced even if you change occupation or have a subsequent reduction in income – that is, you lock in the level of benefit you will be paid in the event of a claim. Indemnity cover looks at your income prior to claim time – as such the premiums are usually 10% to 15% cheaper.
Stepped premiums increase each year as you age because your chance of claim increases. Level premiums remain constant throughout the duration of the policy however they may be adjusted for inflation. Level premiums may be more expensive when you're younger but will not rise dramatically as you get older and are more likely to claim.
The amount of time before you can make a claim is known as the waiting period. One strategy for reducing the cost of premiums could be to extend the waiting period for claim. If you have savings that you can use if you are out of work then you may choose to increase your waiting period. You can also increase the waiting period by using annual leave and sick leave – however you won't have this leave if you start a new job.
We rely on our income to meet the costs for our lifestyle and income protection can protect you in the event that you are unable to work.
A financial adviser can tailor an income protection policy to your situation and needs. This can provide you with the peace of mind to know that you'll be financially covered if you are unable to work and there are no surprises when it comes to making a claim.