Income Protection Plans

How would your household be affected financially if you couldn’t work for a period of time due to injury or illness?

Income protection is a type of insurance designed to protect one of your greatest assets – your ability to earn an income.

The concept behind income protection insurance is fairly straightforward, however there are a variety of different options and benefits that you need to know about before taking out an income protection policy.

Monthly Benefit

The monthly benefit relates to the amount that you are insured for.  Most insurers in Australia allow for a maximum benefit of 75%, which means that if your current pre-tax income is $10,000 per month, the insurer will cover you for up to $7,500 per month.

In the event that you are unable to work due to injury or illness, the insurer will pay the monthly benefit to you for each month that you cannot work.  Generally the benefits will be paid in arrears, and no benefits will be paid until you have completed the waiting period.

Although your monthly benefit is noted on the policy when you first take out the insurance, you may not necessarily receive the same amount in the event of a claim.  The way your benefits are treated will depend on whether you elected for an ‘indemnity value’ or an ‘agreed value’ policy.

Indemnity v Agreed Value

When taking out your income protection policy you have the choice of taking an indemnity value policy or an agreed value policy.

With an indemnity policy you nominate your income at the time of applying for insurance, and your monthly benefit will be based on 75% of this amount, unless you choose a lower figure.

At the time of claim, before you are paid any benefits you will need to provide evidence of your earnings at the time of claim.  If your earnings are lower than you originally nominated, then you will only receive 75% of the income that you are able to prove at the time of claim.

With an agreed value policy you still nominate your income at the time of application, however in this case the insurer will agree to pay your claim based on your income at the time of application rather than at the time of claim.

The benefit of an agreed value policy is that it allows you to lock in your income at the time of application, which takes away the risk of claiming during a period where your income may be lower than normal.

Regardless of whether you go with an agreed or indemnity policy, you will still need to provide evidence of your income either at the application stage or when making a claim.

Waiting Period

The waiting period relates to how long you must be unable to work for before your monthly benefits will commence.

Waiting periods can range from just seven days through to two years depending on the insurer and the type of policy, however the average waiting period for Australians in thirty days.  Essentially this means you must be unable to work for a month before you can claim on your policy.

The purpose of the waiting period is to stop people from claiming when they have just a few days off work, which is similar to how a home or car insurance excess discourages people from claiming on only minor damage.

Benefit Period

The benefit period relates to how long you will receive benefits for whilst you are unable to work.

The minimum benefit period for most policies is two years, with the maximum benefit period running through until the insured person reaches age 65.

The monthly benefits will continue until the benefit period has been exhausted or until the insured person is able to return to work, whichever is sooner.

Other Optional Benefits

There are many other optional benefits available with income protection insurance, and these can vary from one insurer to the next.

Conclusion

Now that we know what options and benefits relate to income protection insurance, it becomes easier for us to understand how the cover works.  In its simplest form, income protection works like this:

Once the waiting period has passed the monthly benefit will be paid until the benefit period has been exhausted.

Income protection insurance is undoubtedly one of the best tools available today for protecting yourself and your family from the financial effects of being unable to work due to injury or illness.

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