Income protection insurance aims to protect (generally up to 75%) of the life insureds income in the event that they are unable to work due to accident or illness. Income protection policies vary greatly. Waiting period, benefit period, type of contract (agreed amount or indemnity), ownership structure and additional benefits are some of the features that need to be taken into consideration when matching your situation to a policy. Also the specific definitions within policies needs to be taken into consideration.
The waiting period on a policy is the time that needs to pass after you are unable to work due to illness or injury before a benefit stream will commence. This can range from 2 weeks to 2 years.
This may reflect the period of time that you can manage, because of leave, annual leave, savings, etc, without requiring an income protection benefit stream.
It is important to remember that benefits are payable monthly in arrears and therefore if you have a waiting period of 30 days, you will need to be able to support yourself financially for 60 days. The longer the waiting period, generally the less expensive the insurance premium will be.
The benefit period is the period for which you will continue to receive an income protection benefit in the event that you continue to be unable to work due to illness or accident. This can be for a set period (i.e. 2 or 5 years) or until a certain age (i.e. to age 60 or 65).
The choice of which waiting period is suitable to you will reflect your goals and objectives in applying for income protection.
The longer the benefit period, generally the more expensive the premiums will be.
Comprehensive Policies/Extras Package
A "comprehensive" policy (or sometimes referred to as an extras package) does not ensure a certain defined level of cover across products, it simply means that the policy is of a higher protection level than the same provider's "basic" policy.
In order to explain the range of costs for policies depending on whether they are "basic" or "comprehensive", the more "comprehensive" policies may include added benefits such as the following:
- Specified Injury and Crisis Recovery benefits – payment of a benefit in the event of a list of specific injuries even if you do not stop working (such as broken bones, cancer, stroke heart attack...)
- Bed Confinement – waiver of waiting period if you are confined to a hospital bed.
- Cosmetic or elective surgery – covered where injuries are caused by cosmetic or elective surgery
- Accommodation – accommodation and travel assistance to family members in the event that you are ill or injured away from home
- Family Care – family income assistance in the event of requiring care assistance from other family members
- Home Care – payment assistance if a full time carer is required
- No-claim bonus – increase of sum insured after a period of no claim without additional cost
- Relocation – assistance with air fares if you are disabled overseas
- Rehabilitation Incentive – assistance with rehabilitation costs
- Guaranteed Future Insurability – guaranteed increases to your benefit in the event of increases to your salary package.
You will need to read the Product Disclosure Statement (PDS) to find specific information relevant to specific income protection products.
Ownership – Superannuation or not?
Recently (within the last 6 months) policy has changed so that insurance companies are now offering some income protection policies to be owned by super funds (either external, SMSFs or their own) with a benefit to age 65. Previously this was not the case as income protection premiums were not deductible to the fund if the benefit period was longer than 2 years. Having a policy owned by superannuation could potentially mean that premiums are payable from your superannuation balance.
However, in many cases the benefits cannot be released at the time of claim especially if you are under the “preservation age” age 55 for many people).
In general terms, only basic income protection policies should be owned via superannuation and potentially even these should be avoided if cash flow allows.
An agreed policy ensures that the full benefit amount is paid in the event of a successful claim whether it reflects your income at the time of claim or not. An indemnity policy will require financial checks at the time of claim and your benefit (if the claim is successful) will be based on pre- disability earnings - i.e. 75% of monies earned in 12 months before claim. This could potentially result in a reduced benefit being payable if you have recently earned less than at commencement of the policy. "Pre-disability earnings" is defined differently by different insurers.
It is important to note that if financial underwriting was not completed at application stage, financial checks will be required at the time of claim regardless of whether the policy is an agreed or indemnity type.
Whether an agreed or indemnity policy is suitable to your circumstances may reflect your employment status (self employed or employee) or whether you plan to change careers in the future.
Other Policy Features:
Increasing Claims Benefit
An increasing claims benefit will ensure that a benefit stream, once a claim has commenced, will increase with CPI each year. This is more important for policies with a long term benefit period (such as to age 65) to ensure that the benefit amount remains relevant to the future value of money.
Day One Accident Cover
Day One Accident Cover ensures that the waiting period is waived in the event that your disability is caused by an accident. This option is usually only available for shorter term waiting periods.