Income Protection Insurance
Income protection insurance is one of the most common forms of insurance in Australia. Income protection policies cover the insured person for loss of income caused by accident and illness. Policies differ, but typically pay 75% of the insured person's income.
Who should buy income protection insurance?
Income protection is designed for anyone who receives a regular income from a job or business. It doesn't matter how much money you earn, because you can generally take out IP cover to match your income. Whatever you spend your money on – enjoying life with your friends and family, paying off your mortgage or building your retirement nest egg – income protection can safeguard your lifestyle from unexpected illness or injury.
If you are self-employed and your income fluctuates then getting the right advice on IP cover is important, so be sure to speak to your accountant or financial advisor before applying. Some insurance policies will allow you to insure an agreed value, which may be very important if your income fluctuates.
There are so many options. Which should I choose?
There are a lot of variations in the terms of IP policies, and your choices can make a big difference to the cost of your premiums. They will also affect how much benefit you can claim and how quickly you can receive payments, so it's important to make balanced decisions.
Here's a brief explanation of some of the main options.
This is one of the most critical differences between policies, which will have a very large impact on the cost.
Cheaper policies are generally indemnity policies. Typically, they allow you to claim up to 75% of your income based on the year before you make a claim, up to the limit you agree in the policy. There is no compensation if you are earning less when you claim than when you took out the policy, even if you have been paying to cover the higher amount.
Agreed value polices generally set the benefit amount at up to 75% of your income at the time you take out the policy. It will not matter if you are no longer earning this much by the time you need to claim. This is an important feature for people with fluctuating incomes, for example contactors whose income is lumpy and therefore could be disadvantaged under an indemnity IP policy.
The waiting period is the amount of time between when you make a claim and when you start receiving payments. The longer the period you choose, the cheaper the premiums tend to be, because shorter-term illnesses will effectively be excluded from the policy (so the insurance company will be less likely to have to make a payment). Some policies will let you choose waiting periods of anywhere between 2 weeks and 2 years. Typically waiting periods of 30, 60 or 90 days are offered.
The benefit period is the lifespan of your policy. This will usually be either 2 or 5 years, or continue to age 65. Shorter policies tend to be much less expensive, since the benefit amount will be significantly less. Most IP polices expire once you reach 65, although you can pay to extend them to age 70.
Income Protection Insurance Case Study
Could you afford to take 7 months off work?
Adam was a fit, healthy 60-year-old with a successful business and a loving family. He exercised regularly and ate well, so he was extremely surprised when he started to feel sick and exhausted.
His diagnosis was colon cancer, and he had to have immediate surgery followed by 7 months of chemotherapy. His oncologist prescribed extended rest and advised that exercise, positive thinking and a lifestyle with absolutely no stress were essential to his recovery.
Adam had income protection insurance which allowed him to take a year off work to recover from his illness. With a mortgage, a retirement fund and a comfortable lifestyle to finance he could not have considered this without his insurance. His income protection policy was a critical factor in his recovery, because it took away any financial stress and allowed him to rest as much as he needed.
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1300 Insurance Pty Ltd ABN 50 124 845 727 AR 327609 arranges this insurance as agent and authorised representative for AWP Australia Pty Ltd ABN 52 097 227 177 AFSL 245631 trading as Allianz Global Assistance (AGA). Travel insurance is issued and managed by AGA on behalf of the insurer, Allianz Australia Insurance Limited ABN 15 000 122 850 AFSL 234708 (Allianz). We do not provide any advice based on any consideration of your objectives, financial situation or needs. Terms, conditions, limits and exclusions apply. Before making a decision, please consider the product disclosure statement, available here. If you purchase this insurance, we will receive a commission that is a percentage of the premium. Ask us for more details before we provide you with services.