Protecting future earnings isn’t something many people think about on a daily basis. But if you suffered a debilitating injury or illness and were unable to perform the duties of your normal job, how would you pay the bills? Income protection ensures you can support yourself and your family during a short- or long-term disability.
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How does income protection work?
What is income protection?
Income protection insurance or disability insurance replaces your income in the short term or long term if you’re unable to work or unable to perform the major duties of your job due to serious illness or injury.
What type of benefit does income insurance provide?
Most policies will provide you with a monthly payment up to 50-60% (with some up to 70-80%) of your total income to keep you afloat during recovery or during a long-term disability. Your income can include any commissions, bonuses or benefits you receive. Premium payments are generally tax deductible.
What does the monthly benefit cover?
The monthly benefit can cover your everyday expenses as well as any long-term debt repayments and medical bills. These expenses can include:
- Education fees
- Credit card debt
- Mortgage payments
- Everyday bills
Who should get income protection?
Income protection insurance protects you from being unable to work and make a living. If an injury or disease kept you from working in the short term or long term, could you rely on other forms of savings or insurance? You’re most likely to need it if you’re self-employed, can’t rely on employer sick pay or have an occupation dependent on your physical health.
How do I actually compare policies?
Is your income fluctuating or fixed?
- Fluctuating. You’ll want to compare agreed-value policies. This means that at the time of application, you and the insurer agree on the income level that’s covered.
- Fixed. You’ll want to consider an indemnity-value policy.
How long can you go without income?
- Not very long. In this case, you should look at policies with a shorter waiting period (the period of time from when you are first unable to work due to serious illness or injury and when you are eligible to receive a benefit payment. A shorter waiting period usually means a higher premium.
- I have time. If you have some savings or sick days left, you might opt for a longer waiting period. A longer waiting period will mean a lower premium in most cases.
How long do you want coverage for?
- For as long as possible. You should look at getting the maximum benefit period on a policy. This will be the most expensive option.
- Just in the short term. If you have additional savings or a support network that can help you cover a long-term injury or illness, then a shorter benefit period may be suitable.
Compare the following policy benefits
Protecting your income is serious business and you want to make sure the policy you are paying for is going to protect you in the way you need. Assess the following benefits as you compare policies:
- Total disability benefit. You will receive a monthly benefit if you meet your disability insurance plan’s definition of total disability. You will receive your benefit from the end of the waiting period to the end of the benefit period.
- Partial disability benefit. You will be paid the monthly partial disability benefit if you meet the definition of partial disability.
- Benefit indexation. Each year, your insured monthly benefit will increase to keep pace with inflation.
- Premium waiver. You will not have to pay your premium if you are eligible to receive the monthly benefit.
- Rehabilitation expenses coverage. Your insurer will pay for the cost of an approved rehabilitation course if it is necessary for your recovery.
- Recurrent benefit. Your insurer will pay a benefit without a waiting period if after a specified period of time at work (usually 6-12 months), you suffer the same or a related disability from a previous claim.
- Death benefit. Your beneficiaries will receive a lump-sum benefit equaling a multiple of your insured monthly benefit if you pass away before the policy expires.
- Needlestick injury benefit. This is a benefit paid if you become infected with HIV, AIDS, Hepatitis A or Hepatitis C as a result of a splash or needlestick injury that occurred at work. This benefit is normally only offered to medical practitioners, and is often also covered through workers’ compensation.
- Cosmetic or elective surgery benefit. You will receive benefits if you cannot work or become totally disabled as a result of cosmetic surgery, general elective surgery or donating an organ.
- Specified injury benefit. You will be paid the insured monthly benefit in advance without a waiting period if you suffer an injury listed in your policy.
- Travel benefit. You can be reimbursed for travel and transportation costs to reach a medical facility or for others traveling to care for you.
- Family care benefit. A benefit will be paid if at the end of the waiting period, a family member’s income is reduced as a result of looking after you while you are totally disabled.
- Worldwide insurance. You will be covered 24 hours a day, 7 days a week anywhere in the world. Some income insurance plans are only available to expatriates living abroad and have different rules about approved countries and receiving benefits.
- Day-one accident benefit. In the event of an accident, you can receive the benefit of your disability insurance policy from day one. Watch out for policies that will require you to be injured for a certain period before backdating the benefit.
- Lump-sum payment. You will receive a lump-sum payment as opposed to a monthly payment if you satisfy the company’s definition of total disablement.
- Child care benefit. You will receive a benefit payment if you are unable to work and your child is dependent on you for everyday needs.
- Retirement optimizer. This covers a portion of your monthly income so that your retirement fund can continue to grow while you are under an income protection claim.
- Pre-existing condition inclusion. Any pre-existing illness or injury might not be included in your coverage, but some policies allow you to include specified pre-existing conditions, such as asthma or heart conditions.
- Business expenses. This covers the fixed expenses of your business if you are a self-employed worker.
- Increasing claims option or claim escalation. This is a paid option that increases the monthly benefit you receive over time by an agreed percentage or in line with annual inflation increases. The increasing claims option is suited to those whose income protection policy pays a monthly benefit of longer than two years and who are not sure if the amount they would receive would be sufficient after future inflation has reduced its value.
Check the structure of your policy
Make sure you understand your policy options and coverage. Ask your insurer plenty of questions when comparing policies. You might have a free review period in the first 7-10 days to change or cancel your policy if you change your mind or the policy terms aren’t what you agreed to.
- Ask for all the details. Don’t be afraid to ask question after question of your insurer until you’re sure you’ve got all the information. This means knowing exactly what is and isn’t covered, how much your benefit amount will be and what your premiums will be now and in the future.
- Keep up with inflation. You can look for a policy that has index-linked premiums and benefits, so you know that your benefit amount will always keep up with inflation costs.
- Look for a non-cancelable policy. A non-cancelable policy means that your insurer won’t reassess your health or circumstances each time you renew your policy, so you won’t be refused coverage or have a premium loading added. You can also take out a policy with guaranteed future insurability so you can increase your level of coverage without your application needing to go back to the underwriter.
- The effects of other income. Be aware that offset clauses can allow your insurer to reduce your benefit payout if you are receiving income from another source, such as sick pay from an employer.
- Make sure you’re happy with the waiting period and benefit period. The waiting period is the time you have to wait before you receive your benefit payout after a successful claim. The waiting period you choose will depend on how much you have in savings, and how long you can survive financially on other benefits, such as sick leave. The benefit period is the length of time you receive the benefit for, whether it is for two months, two years or until retirement.
- Own occupation or any occupation. Make sure you know whether you will be expected to return to any job you are able to perform after an illness or injury, or if you can continue to receive a benefit until you are able to return to your own occupation.
- Understand the terms and conditions. As boring and time consuming as it is to read the fine print of an insurance policy, you want to make sure you understand all of the terms, inclusions, exclusions and conditions of your policy so you know you have the coverage you want and need. You don’t want to be paying premiums for a policy, only to find out at the time of a claim that you’re not eligible for benefits.
What is an agreed value policy?
An agreed value policy means you are insured for the amount of income you are earning at the time of your application. To apply, you will need to provide financial documents to your insurer, but you won’t need to produce this documentation again if you make a claim. The monthly benefit amount will remain the same, regardless of fluctuations in your income over the policy period. This option is ideal if you are a self-employed worker or the nature of your work means that your income fluctuates frequently.
What is an indemnity value policy?
An indemnity value will pay you for what you say you earn at the time you complete an application. You’ll need to verify your income when you make a claim. If your salary has decreased since you took out coverage, your benefit will be reduced to reflect this. Indemnity value is generally a good option if you are not a self-employed worker or are concerned about how your income may change in the future
What do insurance companies recognize as income?
- Pre-tax remuneration paid by your employer, including salary, fees and fringe benefits of the previous financial year.
- Retirement plan contributions made by your employer.
- Commissions and bonuses paid by your employer.
Self-employed worker, contractors and partners
- Income generated due to the worker’s own exertion minus expenses that have occurred during the previous financial year.
In this case your income and benefit amount are assessed when you make a claim. When you make a claim you will also need to provide financial documents, so if your income has changed since you applied for the policy, your benefit will also change to reflect your income. An indemnity policy is often cheaper in premiums than an agreed value policy, and can be ideal if you are in a steady job with regular pay raises and benefits.
How is income protection different from workers’ compensation?
Workers’ compensation or workers’ comp is a nationwide mandate where all employers pay the state or federal government a premium in case the employer, employee or third party is injured at work. The employee can then make a claim and the insurer will pay out compensation and other benefits.
Worker’s compensation should only be viewed as the minimum insurance coverage you need.
While all employees are covered under workers’ compensation, that doesn’t make income protection insurance obsolete. You should view workers’ compensation as the minimum amount of insurance coverage your employer is required to have. Potential benefits are not always guaranteed.
Income protection insurance
- Provides an ongoing benefit payment of usually 75% of your monthly income if you suffer a serious illness or injury.
- Will cover injury and illness that occurs both at work and outside of the workplace.
- Provides additional benefit payments to cover rehabilitation expenses.
- You can choose to have your benefit paid for 2 years, 5 years or to age 59.
- You are generally entitled to compensation if you suffer an injury, disease, illness or psychological injury at or because of your work.
- Workers’ Compensation provides coverage for reasonable medical, surgical, rehabilitation and hospital care for work-related injuries, plus any loss of income during this period.
- Some states require you to make a claim within 30-45 days of the incident.
- Employees who are injured while reckless, drunk, using drugs or breaking rules might not be covered.
- Premiums are funded by the employer.
- You might be required to go to a specific doctor referred by your insurer, who will ask about your medical history to determine any pre-existing conditions.
- Disability payments are typically two-thirds of a worker’s salary.
Find out how much life insurance will cost you
Income protection insurance is a great option to protect your family and livelihood during your working years, but it’s not comprehensive. You might want to consider life insurance, in addition to income protection, to provide for your family after you’re no longer able to. Get a quick cost estimate by answering a few simple questions with our life insurance calculator.
Income protection will help cover your finances if you are unable to perform your duties at work due to injury or illness. It’s a great option for many who are self-employed or are looking for extra protection. But it might not be right for everyone. If income protection isn’t right for, compare life insurance policies to see if this type of insurance might suit your needs.
Frequently asked questions about income protection
¹ U.S. Courts, Bankruptcy Statistics, December 2006-2007
² Gen Re, U.S. Individual DI Risk Management Survey 2011
³ Commissioner’s Disability Insurance Tables A and C
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