Income Protection Insurance

Protect one of your most important assets - your ability to earn an income!
No matter whether you are young and single, or have a family and a mortgage, your income is one of your most valuable assets, because it supports your lifestyle.

While life cover will look after your family when you die, what happens if you can't work because of illness or an accident and it's going to take months to recover? Or maybe you can never work again and you've got school fees to pay, food to buy and a mortgage hanging over your head.

This is when you need income protection insurance, otherwise known as disability insurance. It's estimated that you will earn something like $4 million over your working life, so it would be fair to say that your income needs protecting a lot more than your home and your car. This is even more so given that at the age of 35 you are 10 times more likely to be disabled than die.

What does income protection insurance do?
In effect, income insurance protects your ability to earn. Most policies will pay you up to 75 per cent of your net income either for a limited period or until you reach the age of 65. But there are many variations on this insurance, and it is important you understand what is covered by your policy.

Agreed value versus indemnity
Some policies pay you an agreed value per month while other policies are an indemnity product.

With agreed value, you are paid a monthly sum settled at the time you take out insurance. Indemnity cover is about 20 per cent cheaper than agreed value, but it's also probably about 20 per cent riskier, particularly if you are self-employed.

With indemnity cover, the income paid is determined at the time the claim is made.

This could work in your favour, but it can equally work against you. If your health has been steadily declining and your customers – and in turn your income – have been declining too, you will only be paid on your reduced income.

What determines premiums?
Generally premiums are determined by your age, health and gender, whether you smoke, your occupation, how long you're prepared to wait for your first payment and how long you want the benefit to last. If you can push out the time from making your claim to receiving it from 30 to 90 days, you can cut your premiums by about 25 per cent.

Another determinant is the amount of time the benefit is paid for. A policy that pays out until you are 65 will cost a lot more in premiums than one that just pays you for two, three or five years. If you are only insuring for a two years, there is probably no reason to pay a higher premium for an escalation clause in your payments to cover inflation. That's because the impact of inflation will only be minimal during the period.

Unlike life cover, women pay more for income protection insurance than men because historically women have made more claims.

Similarly blue-collar workers pay more in premiums than white-collar workers.

Is the income protection in my super enough?
Income protection cover available in superannuation policies usually only lasts for two years. As a result it's quite smart to take out separate income protection insurance but with a two-year waiting period. That way you get the benefit from your super for the first two years before your independent income cover kicks in. And the two-year wait can substantially reduce your premiums.

Policy Definitions
Income protection policies carry a range of definitions when it comes to your ability to work. Some refer to your ability to perform your own occupation, while others refer to your ability to perform any occupation. If you're a surgeon and you become arthritic, it may mean you can no longer operate, but it doesn't mean you can't conduct other medical tasks.

So if you have a policy stating "any occupation", you may not be able to make a claim. In contrast, if your policy says "own occupation", your claim is more likely to be accepted. Some insurers have a combination where they will pay you if you cannot perform your own occupation for the first two years but thereafter only if you can't perform any occupation.

Equally, one policy may talk about being able to perform your main duties, while another may merely say perform your duties. Treat this latter definition with caution, as it is far too general and could lead to problems if you make a claim.

Another ambiguity is the ability to work continuously. Say you are on dialysis. You may be able to work three days a week, but the other two you are on the machine. Check whether your insurer will pay out in these circumstances.

Income also needs to be defined. In your policy does it encompass your whole salary package or just the cash component? Also check whether benefits are paid in arrears. A 60-day waiting period may mean you are not paid for 120 days rather than 60 days.

If you have other income this may reduce the money you receive as some policies take into account other income you earn – such as from investments and workers compensation – and will reduce your payments accordingly.