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Income Protection Insurance: An Explanation

Sustaining an injury or suffering a serious illness can be a difficult time in your life. Losing an income as a result of a critical illness or injury only compounds that stress. Income Protection insurance protects you and your family financially when you may need it most. Income Protection provides up to 75% of your income if you are unable to work because of injury or illness.

But just as with any other type of insurance, Income Protection insurance policies vary according to each company. The differing features and types of protection available can be confusing, but all Income Protection policies generally work in the same way.

In Australia, Income Protection is only available if you suffer from a serious disability or partial disability obtained from injury or illness that prevents you from earning a regular income.

How can I get Income Protection insurance?

Income Protection insurance can be purchased as a stand-alone product or it can be included in a comprehensive Life Insurance policy. It can also often be included within a superannuation policy.

When you purchase an Income Protection policy, a number of personal factors will be taken into account. These will vary from policy to policy but generally include:

• Age (the older you are, the more risks you are projected to have – therefore, premiums will increase)
• Pre-existing medical condition
• Industry/Occupation (manual work attracts higher premiums than office work)
• Lifestyle choices

While you are finalizing your policy agreement you will also need to decide whether to adopt an indemnity value or an agreed value policy.

• An indemnity value policy guarantees you benefits based on the amount of your wage at the time you filed a claim. You will have to provide proof of income at the time you submit a claim. It is cheaper than an agreed value policy but if your income has been reduced since you bought the policy, you’ll receive a smaller payout.
• In an agreed value policy your payment is predetermined when you apply for the policy based on a percentage (with a maximum of 75%) of your earnings at that time. It means you’re insured for a set amount from the beginning.

Find out more about indemnity vs agreed value policies here.

How long do I have to wait to receive benefits?

When purchasing your Income Protection policy, you will have to elect a waiting period. This period signifies the amount of time you will be unable to work in your usual occupation before you can qualify to receive your monthly benefits. The benefit is then paid monthly in arrears.

A waiting period can be from anywhere between 14 days up to two years. The longer the waiting period, the lower your premiums will be.

Waiting periods typically start on the date you first consulted a medical professional about your condition and your inability to work. If you have medical proof that your condition started before you sought medical help the waiting period begins on the date you first missed work because of the injury or illness. Some companies may waive the waiting period if you have a recurring sickness or injury.

What happens next?

Once you qualify the waiting period and your claim is approved, you will start receiving your monthly Income Protection benefit until the end of the benefit period (you decide how long this period will be when you take out the cover) or the policy ends, in the unfortunate event of death, or until you can return to work.

Once your claim is approved, you will receive a specific amount in lieu of your income until either the benefit period ends (you decide how long this period will be when you select your cover) or you reach up to 65 years of age, the insured person dies, the policy ends, or the insured person can return to work.

To continue receiving benefits, you will need to show evidence of your ongoing disability in the form of a medical certificate. You will also need to regularly report on earnings and business expenses with proof of income and business receipts.

Don’t be caught out today. If you sustain a critical injury or are diagnosed with a serious illness, you’ll need all the help you can get. An important aspect of recovery is relaxation and you don’t want to be worrying about finances when you should only focus on your recuperation. Knowing what to expect by understanding Income Protection will put your mind at ease at a time when you will need it most. If you’re interested in getting Income Protection, contact us today.