Income protection cover provides you with a monthly benefit if you are unable to work as a result of an injury or illness.
To be eligible, you must be in gainful employment and if you are a contractor or casual worker, you must be working a minimum of 24 hours per week.
Level of cover
An Income Protection policy will typically cover up to 75% of your income on an indemnity basis. This means consideration will be given to the amount of income you are earning at the time of a claim and an adjustment will be made to the level of payment you will receive.
Therefore, if your income fluctuates and you make a claim at a time when you are in receipt of a lower level of income, the amount paid may be reduced. At the time of a claim, a calculation would be performed to establish the lower of either the amount you are insured for, or 75% of your income over the two years prior to a claim being made.
Waiting period
Benefits are paid after a waiting period, which you can select when you apply for the cover. Waiting periods are usually:
- 14 days
- 30 days
- 60 days
- 90 days
- 180 days
- 1 or 2 years.
An important point rarely taken into account is that a monthly benefit is paid 30 days after the waiting period has been satisfied. This means if you have selected a 30 day waiting period, you will not receive a payment for 60 days. This is a key consideration when considering the cover you require.
Payment of premiums
Premiums for Income Protection cover can be paid personally, or via superannuation.
If paid personally, the premiums are tax deductible and benefits can be paid in an increased number of instances when a claim is made.
If premiums are paid via super, it can be a highly effective means of helping you to fund premiums if your budget is tight (and you really require cover). However, due to access restrictions with superannuation, there are a range of limitations for when you can receive a benefit at the time you make a claim. This is an important factor to seek professional advice about.
General considerations
Income Protection insurance can be an extremely effective type of cover, though there are limitations. As with all insurance policies, the value is entirely linked to whether you receive the benefit you expect at the time you make a claim. It is therefore vital to read the ‘fine print’ and ensure you understand what is included and excluded.
Life insurance is complex and can cost a lot of money. It makes sense to seek professional advice to help clarify what you require and the best levels and types of cover to blend together to meet your needs.