RISK INSURANCE GUIDE

What income can I insure

How long are benefits paid for

Waiting period

Limits on benefits paid

Agreed value indemnity

Who needs income protection cover?

Superannuation and income protection

Chapter 3 - Income protection insurance

As the name suggests, income protection insurance allows a person to protect their personal income in the event that they are unable to continue working due to illness or injury.

 

The idea is that if you become sick or injured and you cannot work, then any income you lose can be compensated for by the insurance.

What income can I insure?

 

Insurers will typically only allow individuals to insure income that is related to the insured person’s labour. The general term for this is ‘personal exertion’ income. This is the income that will be lost if the insured person cannot work. So-called ‘passive’ income (income from assets which do not require active management, such as shares or investment properties) is typically not insurable. But this is OK because this income is not lost of the insured person cannot work.

Income protection can be complex. This is because there is a greater variety in the features offered by different providers, and the specific and the same insurer will often offer differing terms to individuals with different income features. Talk to us about your specific income protection needs and we are confident that we can arrange cover that best suits your specific needs.

How long are benefits paid for?

One of the ways that policies differ is in the benefit period. The benefit period is the time over which the insurer will pay income protection benefits. The standard periods are one year, two years, five years, to age 60 or to age 65.

As you might expect, shorter periods lead to smaller premiums.

Waiting period

 

Income protection policies often allow people to alter the waiting periods. This changes the minimum period that a person needs to be off work before a benefit starts to be paid. For example, a person may choose a policy with a 30 day waiting period. If they are unable to work for a period of less than 30 days, then no benefit is paid. If the period off work exceeds 30 days, then benefits start to be paid on the 31st day.

Longer waiting periods reduce the likelihood that a benefit will be paid. This is because people are less likely to be off work for a longer period. This means that insurers are less likely to make a payment on a policy with a longer waiting period.

Limits on benefits paid

 

Income protection benefits are also typically limited to 75% of the pre-disability income. Many insurers take your average income over the two years prior to the illness or injury to calculate pre-disability income. They will then pay 75% of this amount.

Most insurers also apply an ‘absolute’ upper limit. If the absolute limit is $12,000 per month, for example, then this is the most that a person can receive in a month.

Agreed value or indemnity

 

The amount insured can also vary according to whether the policy is an agreed value policy or an indemnity policy. In an agreed value policy, the amount of benefit payable will be established at the time of the policy being written. Such policies typically are favoured by people with variable incomes, such as consultants or casual workers whose income may fluctuate across time.

In the agreed value situation, when the policy is first undertaken, the individual must demonstrate that the amount of insurance is realistic. Once the amount has been established, it becomes the amount that will be payable, even if the individual’s income has fallen during the period of insurance. The main parameter is that the change in the individual’s earning must be considered to be ‘normal.’ You can discuss what this means with your financial adviser.

The under-writing process is longer for an agreed value policy. This is because the income is verified at the time the policy is taken out. This means that the verification happens for the policy even if no claim is made. This means more work for the insurer – and so the premium is higher to pay for this work.

Alternatively, for an indemnity policy, the insurer only seeks confirmation of the actual salary at the time a claim is made. When making a claim, the insured person must be able to prove that the amount for which they insured their income was accurate. If it was not, then the insurer will only pay out 75% of the actual income.

Because the work of establishing the actual income only occurs when a claim is made, and most people do not make claims, indemnity policies offer lowered premiums. Indemnity policies can be useful for people with very stable incomes, such as public servants or other employees with secure employers.

If you use an indemnity policy, and your income situation changes (for example, you change or lose your job), please let your us know immediately.

Who needs income protection cover?

 

Anyone whose circumstances would be negatively affected by a loss of income should take out income protection cover. This includes people with financial dependants such as mums or dads. But is also includes people with financial commitments such as mortgages and other debt.

Essentially, most people should consider income protection cover.

To learn more about Income Protection Cover, please visit the ASIC website here.

Superannuation and income protection

 

Many superannuation funds are able to provide income protection insurance for a period of up to two years. Often, the fund provides a small amount of ‘default cover.’ Default cover is cover that is given to all members without them needing to apply. This level of cover can be increased if the member applies to do so.

The availability of income protection within superannuation can make it easier for people to afford the premium for income protection. This is not necessarily because insurance is cheaper within a superannuation fund; it is more to alleviate demands on day to day cash flow.

2. Life cover
4. Total permanent disability cover

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