People who are self-employed in particular, may be putting themselves at financial risk by not having Income Protection Insurance. If you are the business and you are unable to work, what income is available to you?
Income protection provides you with an ongoing income in the event of you're not being able to work due to illness or injury. There are many possible variations within the policy and it makes sense to choose the options that are relevant to your occupation and lifestyle.
Income protection - 75% of gross distributable income from the business to you or a relative from the net income of the business before tax including any superannuation contributions to you or the relative.
With an agreed value policy, you prove your income upfront and insure to receive a set amount. The advantage is that you know what you will receive, regardless of changes in your income. The disadvantage is that these policies cost more.
With an indemnity policy, you are insured for what you say you earn, but if you make a claim you have to verify your income.
Stepped Premiums are calculated at each policy anniversary date at your current age. Stepped premiums increase each year, with the rate of increase becoming greater the older you become.
Level Premiums on the other hand are fixed at a flat amount and will only be varied if the insurer makes a change to the general level of rates. In the early years of the policy level premiums will be more expensive than stepped premiums, but if you hold your cover over the long term the savings can be significant.
Check our guide "Stepped vs Level Insurance Premiums" for more information.
How long will you hold your policy? Are you going to hold your policy long term?
If you are going to keep your policy for less than 5 years you will usually be better off paying stepped premiums.
You will usually need to hold your cover at least 8 to 10 years before being better off with level premiums. However level premiums can provide considerable savings if you hold your policy for longer than this.
Choosing the right waiting and benefit period on your policy is paramount. This can be the difference between receiving a benefit or not. It also makes a big difference to the cost of your income protection.
If you are able to manage for 3 months of not being able to work and therefore have an Income protection policy with a waiting period of 90 days this will reduce the cost by approximately one-third.
If you have some Income Protection within your superannuation fund that you are happy within a benefit period of 2 years, an additional policy may be purchased with a waiting period of 2 years in order to further reduce costs. This will ensure that you will be protected for more serious (longer term) illness and accidents that keep you away from work for longer periods of time or even for the rest of your life.
Check our guide "Waiting Period and Benefit Period in Income Protection" for more information.
Because there are so many income protection products with so many options you should seek advice on the subject from a financial adviser. As with all insurances and financial products income protection should be considered as part of an overall financial plan.
We compare up to 9 insurance companies in Australia, so if you are self-employed and would like to find out who offers income protection insurance for your particular requirements, please call us on 1300 793 143 or fill out the form on this page.