Income protection is a type of financial security for your income. In the event you are unable to work due to sickness or injury, you’ll be paid a monthly benefit as a replacement for your salary during the time you are out of work. Payments range from 75 to 80 percent of your taxable income so that you can keep up with future expenses until you can return to work.
How does income protection work?
Income protection insurance is a stand-in for your regular taxable income to ensure you don’t fall behind on your financial obligations. You can choose to cover a smaller amount of your income if you wish to pay lower premiums, but this will reduce your benefit amount. You’ll have to finish your policy’s waiting period before you can make an insurance claim. You can choose the waiting period when you take out a policy, and in most instances, the waiting period is between two weeks and three months. Once the waiting period ends, you can file a claim with proof of your inability to work.
When your insurance company approves your claim, you’ll receive monthly payments of your benefit amount. You can use these payments to maintain your standard of living, pay your mortgage, pay off debts, cover living expenses, and pay medical bills.
Unlike worker’s compensation, which only covers work-related injuries, income protection is applicable anytime and anywhere and has a more streamlined claim process.
What’s covered under income protection insurance?
Some insurance companies offer an optional involuntary unemployment benefit, or redundancy coverage, that allows you to submit a claim if you are terminated unexpectedly. Income protection insurance covers you in the event of prolonged illness, total disablement, severe partial disablement, and redundancy if you opt for additional coverage.
The financial security offered by income protection is important if you are a sole income earner, especially if you have dependents. It’s also a smart option if you are self-employed. Income protection insurance is the same as disability insurance in that both protect your ability to work and pay for future expenses. Your insurance company may deny you income protection coverage if you apply after becoming ill or injured. Your health and any pre-existing medical conditions are taken into consideration, and you may pay higher premiums depending on the nature of your condition or type of injury.
The older you are, the more likely you are to suffer an illness or injury. Most income protection policies have a maximum applicant age of 59, though some insurance providers allow applicants up to 64 years old. At iSelect.com.au, you can learn the basics of income protection insurance and compare policies from a range of providers. You can discover how your age, own occupation, income level, and health status determine your coverage and find the right insurance coverage for your situation.
What types of coverage are there?
There are typically two types of coverage to choose between when taking out an income protection policy. Agreed value insurance allows you to receive a benefit amount of up to 75 percent of your taxable income at the time you take out the policy. You do pay higher premiums with this type of coverage, but it can help preserve your benefit if you are unsure about the status of your future earnings or how much income you’ll need to cover future expenses.
Indemnity policies are more common than agreed value insurance. They adjust your benefit payout to reflect your current income at the time you make a claim. These policies come with lower premiums, but you could see a reduction in benefits if you drop to part-time work, if you take an extended leave, or become unemployed.
Having the peace of mind of financial security in the event you can’t work because of illness or injury allows you to focus on getting healthy so that you can return to work without the stress of keeping up with expenses.