Income Protection Insurance is a monthly benefit which is paid to you if you are unable to work due to illness or injury, Income Protection Insurance will pay you an ongoing income up to 75% of your annual salary.
Due to the Australian industry standards, you can apply for cover up to a maximum of 75% of your earnings. For business owners, this equates to whatever your income is after business expenses, but before tax. The amount of Income protection you require will depend mostly on you and your family’s monthly expenses and/or cost of living. Adding ancillary benefits to this will protect you if you suffer illness or injury as well as protecting your superannuation, by continuing to pay your superannuation contributions.
In many cases benefits will be adjusted if you receive payments from sick leave, social security, workers compensation or other legislative sources.
Benefits of Income Protection
You’ll receive an ongoing monthly payment that will:
Help you to cover your living expenses and debt repayments.
Help to protect you from having to exhaust your savings, sell assets or rely on Centrelink for assistance.
Why do I need Income Protection?
People are used to insuring their houses and their cars. Income Protection, however, is a different matter. While most people would never consider driving a car without motor insurance, less than a third of the population insure their most important asset – their ability to earn an income. This leaves a significant proportion of the population facing financial hardship if they were to have an accident, become sick or die.
Waiting Period and Benefit Period
In the event of a successful claim, benefit payments do not start immediately as they are paid in arrears. A waiting period will apply during which no benefit is payable. You will need to choose a waiting period when you choose your cover. It’s important to take into account any sick leave and related benefits that would be paid by your employer, as these may allow you to endure a longer waiting period. The longer the waiting period, the cheaper your premium.
A benefit period is how long you will receive your benefit for if you are unable to return to work. You will need to choose your benefit period when you choose your cover. The shorter the benefit period, the lower the premium.
Agreed VS Indemnity Value
You can obtain your Income Protection Insurance under an Agreed Value or Indemnity policy. Under an Agreed Value policy, you will receive the agreed monthly benefit at the time of a successful claim, regardless of the amount you are earning at that time. You’ll need to provide proof of income at the time you apply for cover. This is a good option if your income fluctuates over time as your payout is only dependant on proof of an income at the time of application, not the amount you are earning at the time of claim.
Under an Indemnity policy, the amount you receive at the time of a successful claim will be assessed on your earnings prior to the disability. You will need to provide proof of income at the time of claim. Your payment will be the lesser of your income or the sum insured. This is a good option if you have a stable income and can easily substantiate your income at the time of claim, your occupation does not allow an Agreed Value policy, or you have only recently established your business and do not have two years of financial evidence available. The premium for an Indemnity policy is less expensive than an Agreed Value.
How can I pay for my Income Protection?
Most Australians with a superannuation fund may be able to utilise their superannuation funds to pay for their Income Protection policy. Otherwise, Insurance can be paid out of pocket monthly or annually depending on the preferred payment methods defined by your insurance provider.
Stepped and Level Premiums
Stepped premiums are initially cheaper, however will increase each year – normally on your birthday, or on the policy anniversary date. Stepped premiums are beneficial to insurance policies intended to be held short term. The amount the policy initially increases often goes unnoticed by policy holders, however once policy holders reach a certain age, the amount they pay for their insurance can rapidly increase. By the time you notice this drastic increase, it may be too late – leaving you with an insurance policy that is unsustainable and unaffordable – when you need it the most.
Level premiums allow you to lock-in your premium, sometimes right through to retirement age. Level premiums are beneficial for insurance policies intended to be held long-term. This type of premium initially will be more expensive than stepped premium but can often result in greater savings over the long term. Most importantly, level premiums can ensure that your insurance cover remains affordable and sustainable when you need cover the most.
GI Advisers helps Australians secure their income. The appropriate structure of cover is different for every individual. To get an approximate idea of the most appropriate Income Protection structure suitable to your needs, you can get a quote or contact us at our Brisbane head office.