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.
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 many Australians is 30 days.
A longer waiting period will usually equate to a lower premium, whilst a shorter waiting period will usualy 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.
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 usually 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.
This article is about income protection insurance and is general information only. It should not be treated as factual, as personal advice or be the basis of purchasing any insurance policy. Before deciding on an insurance policy read the PDS carefully and talk to a licensed insurance agent if you need further assistance. MoneyBuddy does not recommend insurance products or provide personal advice in regards to insurance products.