Who will look after your finances if you cannot work due to sickness or injury? Though health insurance may cover a certain proportion of your medical bills, it will not cover your living costs, rent or mortgage.
However, with an income protection plan, you may get up to 75% of your regular income if you cannot work due to sickness or disability.
What is Income protection insurance?
Income protection insurance is a type of insurance policy that will pay a person a percentage of his/her income if they are unable to work because of an injury or illness.
It is a monthly benefit that pays you up to 75% of your income and covers you for illnesses, accidents, or traumas. It pays you until you return to work, and if you cannot return, then it will pay until your retirement age which often depends on your occupation.
This insurance policy is tax deductible and is tailored to make sure that you can maintain to feed yourself and your family, pay your mortgage, and carry on your financial obligations until you return to work.
Who should opt for income protection insurance?
Income protection plans are intended for regular workers who depend on consistent monthly income to make utilities, car loans, mortgage, and other monthly payments.
It is for:
a. People working full time
b. People in a high-risk or specialised occupation, and
c. People with debts and dependents
If income protection insurance is not available, you may need to pay all of these expenses out-of-pocket. Also, if you do not have disability benefits through your employer, a private policy is your best option to protect yourself from extended periods of unpaid sickness or injury.
Illnesses and injuries from accidents may also make returning to work longer.
Key features of Income protection insurance policy include:
a. Benefit level: The percentage of your monthly income that the policy will cover in the event of a claim. In Australia, most insurers sell policies that cover up to 75% of their insured’s income.
b. Benefits period: The amount of time that the insured is eligible for to get the benefits is called the benefits period. This can range from 1 year to until the age of retirement.
c. Waiting period: The amount of time you need to be out of work before you can start getting the monthly benefits. This can range somewhere between 2 weeks to 2 years. Longer waiting periods means less premium payments and vice-versa.
d. The maximum and minimum age to enter into the policy is 18 and 60.
e. Premiums are tax deductible.
Types of Income protection Insurance Policies:
There are 2 main types of IP insurance; short term and long-term.
Short term: Short-term plans pay out for 12-24 months and are designed to be simple, low cost and available to the majority. These short-term plans exclude things like stress, back problems, and pre-existing medical conditions, but can be extended to unemployment. The premium cost is mainly based on your age and is not affected by your medical history or unemployment.
Long-term: Long-term plans mainly focus on health rather than employment. They provide long-term benefits and can pay you as long as you require, even up to the age of retirement. In Australia, consumers have the option of buying three different types of income protection policy coverage.
They are agreed coverage, indemnity coverage, and guaranteed coverage. The type of insurance coverage you opt will affect how the policy functions and the cost of the premium.
a. Agreed coverage: With an agreed coverage policy, the level of monthly benefits is agreed upon by you and the insurer during the signing of the policy. So during a claim, you would only need to prove your income at the time of signing the policy.
b. Indemnity coverage: Indemnity policies are the least expensive form of insurance coverage. In an indemnity claim, the value of paid benefits will be determined by the insurer at the time of the claim. For this purpose, the insurer will require proof of your earnings for the relevant period.
c. Guaranteed coverage: The guaranteed policy is a slight variation of the agreed coverage policy in which the financial evidence is assessed and verified at the time of signing the policy. The claim process is quite easy in this type of policy due to the fact that the verification process is already completed at the time of signing the policy.