How Income Protection Insurance Works

Income protection is a type of insurance designed to replace your income in the event that you cannot work due to injury or illness.

The policies can vary from one insurer to the next, but all will have three common elements: the waiting period, the benefit period and the benefit amount.

The waiting period is the length of time you must be unable to work for before claiming; the benefit amount is the monthly payment you will receive once on claim; and the benefit period is the length of time you will continue to receive payments for.

Let’s say you had a policy with a 30 day waiting period, a $5,000 benefit amount and a two year benefit period. You would have to be unable to work for 30 days, and then you would receive $5,000 per month for up to two years.

Now we will take a look at each of these elements in more detail.

The Waiting Period

This is the length of time you must be unable to work for before you can claim on the policy.

Waiting periods can range from seven days through to two years depending on the insurer, however the typical waiting period chosen by most Australians is 30 days.

A longer waiting period will equate to a lower premium, whilst a shorter waiting period will attract a higher premium.

When considering the waiting period it is important to remember that income protection claims are generally paid monthly in arrears. This means that you will not receive any money in your hand until one month after the waiting period has ended.

The Benefit Amount

This is the amount of money you will receive each month whilst you are on claim.

Most income protection policies will pay a maximum benefit of 75% of your annual income, however there are some policies that will go to 80% for certain occupations.

The benefit amount is selected as a dollar figure when taking out your policy. If your monthly income was $10,000, the maximum benefit amount based on the 75% rule would be $7,500. You can choose to insure for less if you wish, but not more.

There are two benefit types with income protection insurance: agreed value and indemnity value.

An indemnity value policy will pay up to 75% of your income at the time of claim. You will be required to provide evidence of this income at the time of claiming. If your income is lower than listed on the insurance application, you will only receive 75% of your income immediately prior to the claim rather than the amount listed on your application.

An agreed value policy will also pay up to 75% of your income, however the income figure is taken at the time of application rather than at the time of claim. You must still provide evidence of your income, and this can be done either when applying for the policy or at the time of claim. Either way the income evidence will have to be for your income at the time of application.

The benefit of an agreed value policy is that it locks in a certain amount of cover, so you will not lose out if your income happens to be lower at the time of claim. An agreed value policy will attract a higher premium.

The Benefit Period

The benefit period is the amount of time you will continue to receive benefits for once you have passed the waiting period and lodged a successful claim.

Benefit periods can vary from one year through to age 65, and even age 70 in some cases. The shorter the benefit period, the lower the insurance premium will be.

Typical benefit periods for most policies are two years or to age 65. With a two year policy you will continue to receive benefits for two years or until you are able to return to work, and an age 65 policy will continue to pay you benefits until you reach age 65 or are able to return to work, whichever is sooner.

The Benefit of Income Protection

The overall benefit of income protection insurance is that it replaces your income whilst you are unable to work. This ensures you can keep a roof over your head and food on the table.

Ideally a policy with a short waiting period and a long benefit period is the best option, however any level of cover will be better than no cover at all.

Get Income Protection Quotes

It can be surprising how much income protection quotes vary between insurance companies. By speaking to a qualified broker, you can easily compare life insurance and income protection quotes and select the option that best suits your needs and your budget.