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5 Facts About Income Protection Insurance you Need to Know

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Income insurance does exactly what it sounds like—it’s a type of insurance that protects your income. However, unlike health, home, or business insurance, income protection insurance is bought into when living in Australia and isn’t often considered a necessity.

Whether you’re young or old, income protection insurance should be bought by anyone who works for a living.

Fact 1: Income Protection Covers 75-85% for 2-5 years

While comparing income protection insurance companies in Australia, you’ve likely come across the “Maximum % of Income Covered” section. Unfortunately, no company will cover all of your income, but the majority of them will offer those who qualify 75% of their normal income.

Income protection insurance often covers you for 2-5 years or up to the age of 65. If losing your entire income would impact you or your family, be sure to save the remaining 25% of your income in a separate account. You may want to add extra funds on top of the remaining 25%, so you can protect your family if you’re permanently disabled and can’t go back to work.

Fact 2: Income Protection Covers Illness and Disability

Income protection has coverage options for periods of longer-term illness, involuntary unemployment, total and severe partial disablement. Involuntary unemployment may also be called redundancy insurance, which is a monthly benefit paid out if you lose your job.

Unfortunately, income protection insurance will not cover illnesses or injuries that last less than the policy’s waiting period (see “Fact 4”), voluntary resignation, pre-existing conditions, and regular pregnancy. 

Keep in mind that income protection insurance may withhold coverage if you don’t submit a claim to your employer if you were injured while on the job.

Fact 3: Income Protection Varies Based on Your Health

When opting for a standalone policy, your insurance broker will ask you standardized questions about your age, job, income, medical history, lifestyle, and high-risk hobbies. This information will determine if they should insure you, the cost of your premiums, and the terms of your policy.

Individuals who buy into income protection insurance that are young, have a low-risk job, a modest salary, and have no pre-existing health conditions will expect to pay lower premiums.

However, if you’re young and drink often, take recreational drugs or smoke, your premiums will rise significantly. Avoid risky activities to keep the cost of your insurance low and manageable.

Fact 4: Income Protection Costs Vary Based on Policy

Income protection insurance comes in two policy types: indemnity value and agreed value. Indemnity value is less expensive, as it ensures you for a certain percentage, which drops if you make less money. Agreed value is more expensive as it pulls from an agreed amount.

Your income protection policy will also change based on your chosen waiting and benefit period:

 

  • Waiting Period: The amount of time you need to wait before your payments start. Most insurers will have a range between 14 days-2 years; others will begin immediately.
  • Benefits Period: The length of time insurers will dole out monthly payments. The minimum in Australia is 2 years, and the max is 5 or up to 65 years of age.

 

A longer waiting period coupled with a shorter benefits period is the least expensive option.

Finally, you can choose between stepped or level premiums. Stepped premiums start low but increase each year based on the higher chance of claims as you age. Level premiums start high, but changes to your costs aren’t based on age, so increases happen less often.

Fact 5: Income Protection May be Included in Your Super Fund

If your company or insurer offers a superannuation policy or “Super Fund,” you may already be paying into income protection insurance without even knowing it. Speak to your employer or insurer before taking out a standalone policy. Otherwise, you’ll pay more than you should.

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