Do I need income protection and if so, how long should I get it for?
What is income protection?
Income protection insurance is designed to cover a portion of your wages for a specified length of time. This payment can be vital in the event of unexpected illness or injury, when your life is disrupted, and you have the added stress of the financial implications of being unable to work.
Can I tailor my policy for my own occupation?
Different injuries have very different implications for people, so always make sure that your policy is tailored to your own needs. While we are all similarly susceptible to cancer, if an NRL or AFL player broke their leg or tore an ACL, or Ian Thorpe broke his arm, it could be career-ending. If these injuries happened to you in your desk job however, you might be out of the office for a week, then back at your desk in a cast.
This is an example of where the same accident would result in different eligibility for different policyholders. Ian Thorpe would be able to make a claim on his injury because he would be unable to get back to work, whereas you most likely wouldn't be eligible to claim, as you’d be back at work a week later and your sick leave would probably cover you for the time you had off.
What is an income protection benefit period?
In the case of a successful claim on an Income Protection policy, the benefit period is how long your insurer will pay you for. Your insurer pays you an agreed percentage, usually up to 75% of your gross monthly earnings, during this period of time.
A variety of factors can influence how long you choose that the length of time to be, including provider and policy features and, like with health insurance, the level of policy you select.
What are the different benefit period options?
Insurers typically offer benefit period options of 2 or 5 years, but there are also a few shorter options including 6 months and 1 year. There are other benefit periods which end once the policy holder reaches a certain age, such as 65 or 70 for example.
The length of time you can get cover for is dependent on what you do for work and the longer the benefit period you choose, the higher the cost or premium of the insurance policy. Shorter benefit periods have a lower premium.
Comparing policies and levels can be confusing, so using a Financial Adviser who can streamline the search and find your best options, can simplify the process and ensure you get the most suitable policy for you.
How long should I get income protection for?
Statistically, in most cases, rehabilitation is possible within two years.
Shorter benefit period
If your main concern is injury or illnesses which would result in only a short period
off work, a lower-premium, shorter benefit period policy might suit you best.
Longer benefit period
If your main concern is protecting yourself in the instance of a major accident or
illness including permanent disability or inability to work, a policy with a higher
premium and longer benefit period might suit you best.
How do I choose the right length benefit period?
How long your cover will pay out, the benefit period, directly correlates with how much your premium costs. Like with health insurance, if you have Top Cover, you will get more ‘back’ than if you have entry level cover.
Make sure you do your research or consult an insurance expert or Financial Adviser, to find a policy with a benefit period which suits your needs but is affordable for your circumstances.
You need to consider a variety of factors when deciding on the right income period for you:
Current and future expenses
Your current lifestyle costs a certain amount to maintain and would need to be covered during a period with no income. Calculating your current costs can help you determine if a short-term policy is best for you.
Then there’s the future - will you have school fees or medical expenses which would be hard to cover in the case of loss of income? If you want to protect your income in times of serious injury or illness, such as permanent disability, you may prefer to choose a longer-term benefit period.
Does your financial situation allow for a longer benefit period and the associated
higher premium, or a shorter, less expensive premium?
Do you have a mortgage, credit cards or other loans or repayments? How long are
the loan payment periods and how would you service these loans during a stage
with no income?
Different covers suit different professions. A crane driver or road builder would
generally face more risk day to day than an office worker. Make sure you get expert
advice on which cover suits your profession – you don’t want to pay a premium for
being a shark catcher when you work in accounts.
Check your Superannuation statement to see if it includes income protection and if
so, how much it covers and for how long. If it does include some cover, you may still
choose to get a separate policy to make up for any predicted shortfall to maintain
What is a waiting period?
The waiting period is the amount of time before your benefits start being paid to you, not the length of time they will be paid for. It’s cheaper to have a longer waiting period as you pay a premium to have your benefits start being paid to you quickly.
Insurers offer a variety of waiting periods, but common ones include 30, 60 or 90 days or 2 years.
If you can’t work once the benefit period is over, you may be eligible for total and permanent disability (TPD) payment if you have taken out one of these policies.
How the benefit works when I need it
When will my benefit period start?
You won’t start getting paid your benefits the day you get injured or become ill. You
will need to see your GP or medical practitioner to determine that you are unable to
work due to injury or sickness and you may need to send information from your
employer about why your circumstance will prevent you from working. Once they
have determined that you cannot work you can lodge your claim for benefits with
your insurance company. Once your claim has been approved and your waiting
period has passed, your payments will begin.
When will my payments stop?
As a general rule, you will stop receiving benefits when:
The benefit period ends
Your policy expires and you haven’t renewed it. It is your responsibility to maintain the policy
You recover and return to work
You pass away
You reach the maximum age of your policy
You forfeit the policy regulations. If you have failed to disclose requested or relevant medical information or have acted in a way contrary to the insurance contract outlined in your policy, your insurer can cancel it.