What Is Income Protection Insurance – Is Income Protection Insurance Worth It?

What Is Income Protection Insurance – Is income protection insurance worth it? Many of us would struggle to keep up with our essential expenses such as mortgage and rent if we lost an income through illness or accident. Income protection is a long-term insurance policy that ensures that you receive a regular income until you retire or can return to work. Find out what is income protection insurance, how it works, when you need it and what to think about when you buy it.

Table of Contents

What Is Income Protection Insurance?

Income insurance is a monthly benefit that is paid to replace your income if you are unable to work due to illness or injury. Usually, the payments are between 75-85% of your normal income.

It is a very useful insurance policy if you depend only on your income for your livelihood or if you have large financial obligations that you would incur if you could not earn an income.

Conveniently, income protection is often offered as part of retirement policies. If you prefer income protection outside your supermarket, you can also opt for a stand-alone policy.

How Does Income Protection Insurance Work?

When applying for income protection, think about how much of your income you want to cover if you are unable to work due to illness or injury. It is worth noting that you can keep up to 75% of your income. After determining the chosen percentage for the insurance, you must choose a “waiting period” and a “payment period”.

The waiting time is the time you wait from the day you apply to the time your insurance company starts paying. This period can vary from one month to 13 weeks at your discretion. After the waiting period has ended, your insurance company will pay you regularly.

Your insurance company will pay you over the pay period, which can be for two years until you retire or when you can return to work, that’s up to you.

Income Protection Insurance:

Provides periodic benefits that replace part of your income if you are unable to work due to illness or accident
Pays until you can return to work – or until you retire, die, or reach the end of insurance term – whichever comes first
Usually pays between 50% and 65% of your income if you can’t work
Covers most illnesses that prevent you from working – short or long term (depending on the type of policy and your definition of disability)
It can be claimed as many times as you need for the duration of the policy.
There is often a pre-agreed (“deferred”) waiting period before payments begin. The most common waiting times are 4, 13, 26 weeks and a year. The longer you wait, the lower the monthly premiums.
It’s not the same as critical health insurance, which pays out a lump sum if you have a specific critical illness.

What Does Income Protection Insurance Cover?

These are some of the common things you are covered for and also what is generally excluded from income protection insurance.

What income protection insurance cover:

Prolonged illness
Total deactivation
Severe partial disability

What income protection does not cover:

Redundancy (an optional extra on some policies) – Important note, this product has been largely discontinued during COVID-19.
Illness or injury that lasts less than the policy waiting period
Voluntary dismissal from work
pre-existing conditions
Typical pregnancy.

When Do You Need Income Protection Insurance?

If we are unable to work due to illness or accident, you can assume that your employer provides a certain income.

In reality, however, the employee is usually transferred to statutory absenteeism within six months.

Very few employers support their employees for more than a year when they are sick from work. See what your employer will arrange for you if you are ill.

Depending on how much savings you have, the loss of income may soon leave you unable to pay essential household bills such as mortgage/rent and utilities.

It can be particularly difficult if you are self-employed and therefore have no sick pay to fall back on.

Who Doesn’t Need Income Protection Insurance?

You may not need income protection insurance if:

You can survive on your sick pay – for example, you have an employee benefits package with which you have an income for 12 months or longer
You can survive on government benefits – as long as they are enough to cover all your expenses
You have enough savings to support yourself – keep in mind that your savings may last a long time
You could retire early
Your partner or family would support you – for example, your partner has enough income to cover everything the two of you need.

How Much Does Income Protection Insurance Cost?

How much you pay in premium each month depends on the policy and your circumstances.

Income protection policies cover a wide variety of illnesses, conditions and situations. That is why it is important to compare what different insurers can offer you.

The costs are affected by:

Your age
Your profession
If you smoke or have smoked
The percentage of income you want to cover
The waiting period (or ‘deferred’) period until the policy is paid
The number of illnesses and injuries covered
Health – your current health, weight and family medical history.

The costs also depend on whether you pay:

A standard premium, which the insurer can increase over time, or
A guaranteed premium, which remains fixed as long as you have the policy.

Guaranteed prices may cost a little more in the short term, but many people like the certainty of knowing what they will pay in the future.

How do I buy income protection insurance?

Premiums can vary and different insurers can use very different criteria. So it’s worth doing a little research and research.

The best way to ensure you get what you need is to seek advice from an independent financial advisor or specialist broker. They can show you the details of the different policies available and make sure you choose the right one.

They can charge a fee for their services or they can get a commission from insurance companies.

There are also specialist brokers and insurers for people who have been denied insurance. This could be because of a medical condition or because they are doing work that is not covered by the standard policies.

Five things to consider when buying income protection insurance

1. Be honest about your medical history

It is important to provide your insurer with all the information they request. When you make a claim, the insurer will check your medical history. If you have not answered your application truthfully or correctly or have not disclosed something, you may not receive the payment you need.

2. Choose an appropriate coverage level

You can choose from three main levels of coverage, which pay based on your situation:

Own occupation – you cannot do your own occupation. It’s usually the most expensive, but you’re also more likely to make a successful claim.
Appropriate Occupation – You cannot do your own or similar work that matches your qualifications and experience.
Any profession – you are too sick to do any work. It is usually the cheapest, but there is a greater risk of not paying.

3. Read the fine print

Please take the time to read and complete the app. Make sure you know exactly what is and isn’t covered. Please note that definitions and exclusions (what is not covered) may differ between different insurers. If you see something you don’t understand, ask your insurance company, insurance broker, or financial advisor.

4. You can change your mind

You have 30 days from the purchase of the policy to change your mind and get a full refund.

5. Keep your coverage up to date

Circumstances can change over time, so check your policy regularly to make sure it still covers what you need.

You may need to increase it. For example, if you have a child or take out a new mortgage, you may need more coverage than is stated on your policy. Or, if you get a new job with more generous sick pay, you can lower your coverage level.

How to claim income protection Insurance?

Contact your employer and insurer

You should do this as soon as you get sick or injured and are unable to work. Your insurer will send you the necessary documentation to file a claim.

Fill in the complaint form

You must complete a Payroll Continuity Report that includes a statement from your primary care physician, a Tax Registration Number Return Form, an employer income replacement report, information about your leave and payment history for the past 12 months, and proof of age, such as your driver’s license, birth certificate, or passport.

Wait for your insurer to respond

Send the complete documentation to your insurer by post or email. Your claim will be assessed once the waiting period you chose when you took out the policy has expired (30, 60, 90, 120 or 180 days).

How long do you have to apply for income protection?

There are time limits for filing income protection claims (usually 6 months from the time you become ill or injured), so you should file a claim as soon as possible after the illness or injury occurs and you are unable to return to work.

How long does a claim take?

Your insurer will not assess your claim until your waiting period has expired (between 30 and 180 days). After that, it may take several weeks or months for your claim to be assessed, depending on whether more information is needed or whether the insurer requests further medical examination.

When does an income protection claim pay out?

For an income protection application to be honoured, you must meet one of the following criteria:

Total handicap. Your insurer considers you completely incapacitated for work if you are unable to perform one or more important tasks of your own profession due to illness or injury (tasks that take up 20% or more of your work) and you are regularly under treatment and advice of your doctor.
Partial disability. It is when your illness or injury prevents you from performing one or more important tasks of your own profession to the same extent as before. To be eligible, you must receive regular care and advice from your GP.

Questions that will be asked during the income protection application process

You have a duty of truth to your insurer, both when applying for coverage and when submitting a claim for income protection. These are typical questions your insurer will ask you:

Has your GP confirming that you are likely to be unemployed for longer than the waiting period?
Have you suffered from this or a related condition in the past?
What are the roles you fulfil in your profession and the estimated time you spend on each?
Do you plan to return to work for the same employer after recovery?

How much do I get if I have to claim?

You will receive a maximum of 75% of your “income before incapacity for work”, this is the income you earned before you became incapacitated for work).

Typically, pre-disability income means your income for each consecutive 12-month period in the last three years before the disability.

Your claim payments cannot exceed the amount that you have insured. Suppose your income is now $50,000. You can insure up to 75% of that (that’s $3,125 per month). Even if your income at the time of disability had increased to, say, $75,000, you would still only receive $3,125 for having insured it.

The claims you receive are taxed by the IRD as income (on the other hand, your premiums are tax-deductible).

It is important to regularly check your cover amount and increase or decrease it with changes in your income.

Why do I need income protection insurance?

Only a minority of employers support their employees for longer than a year when they are out of work (see our guide to statutory sick pay). Given the low level of available state benefits, anyone of working age should consider income protection.

But when we asked the public, only 9% said they had some form of income protection, compared to 41% who had life insurance and 16% who had private health insurance.

Millions of us have policies such as private health insurance and payment protection insurance, which have been sold to us over the years by vendors who convinced us we needed protection.

While they were right about protection, they were often wrong about policy. The one protection policy every working adult in the UK should consider is the one most of us don’t have: income protection.

Frequently Asked Questions

What information do I have to provide with my application?

When applying for your income protection policy, your insurer asks the following questions:

Basic information. Things like age, gender, income and occupation all play a role in your premium costs.
Medical conditions. If you have pre-existing medical conditions, such as diabetes or kidney problems, or if you smoke, your insurance company needs to know. Sometimes they will need a copy of your medical history.
Other relevant information. If there is anything that you think could affect your coverage, for example, if you are planning to switch to a part-time job soon, let your insurer know.

Since you are the one purchasing the policy, you also have the right to ask questions. You may want to consider checking the following:

Disability Definitions. As mentioned earlier, insurers define disability in different ways. Make sure you know what your insurer uses.
How the cover changes over time. Some income protection policies may change as you get older or change your profession.
Waiting times for accidents. Certain policies skip the normal waiting period in the event of an accident and start paying your benefit straight away.
Exclusions. Make sure you know what your policy doesn’t cover.

How does an income protection policy come about?

When it comes time to take out your income protection policy, you can choose between two types:

Agreed Value Insurance. On this basis, you can designate a fixed benefit amount up to 75% of your income when you take out the policy. While this is the most expensive option, it can help you keep your benefits if you’re unsure of your future income or know exactly how much you’ll need to survive if you can’t work.
Disclaimer Policy. These are more common and will adjust your benefit amount according to your income at the time of application rather than when you purchase the policy. They are cheaper, but your benefits could be affected if you stop working part-time, take extended leave or become unemployed.

Who Can Apply For Coverage?

Coverage is generally available to Australian residents between the ages of 18 and 63 (age at next birthday). The maximum age for some policies is 59 years.

Can I get coverage if I only work part-time?

In general, you must be employed for a minimum of 20 hours per week and work in the same job for a minimum of 12 months. The benefit is based on your pre-tax income after other related expenses have been accounted for.

Can I get cover if I am self-employed?

Yes, if you work at least 20 hours a week and have been self-employed for at least 12 months. You must provide some form of proof to insurers about your earnings.

Can I get coverage if I have a risky job?

This depends on the nature of your profession and the insurance company you choose. Insurers have different conditions for eligibility for employees. It may be worth seeking help from an insurance adviser who can use their knowledge of the market to help you find a suitable option.

How much coverage do I really need?

While most policies offer a standard coverage level of 75-85% of your income, you can find coverage with a reduced benefit amount. Think about what you would have to cover if you couldn’t work.

It’s also worth noting that some insurers only offer a maximum monthly benefit (such as $12,000 per month), so it’s worth checking to see exactly what you qualify for.

Can I increase or decrease the coverage I qualify for?

Yes, you can choose to adjust your policy (depending on the policy/insurer you choose) or increase/decrease your premium as you see fit.

Can I provide cover for my partner if he works from home?

New. You must apply for coverage individually (as opposed to joint life insurance). If your partner is a housewife, you can apply for coverage and include it in the so-called housewife option. The insurer will also need to verify your details for the cover to take effect.

Do I need income protection if I already have life insurance?

Life and income coverage protects a variety of reasons, and implementation is worth considering. Life insurance policies provide a lump sum payment in the event you die or develop a terminal illness. Income Protection provides a continuous monthly benefit while you are unable to work for an extended period of time.

Do I still have to pay coverage if I receive the benefit?

No, you do not have to pay coverage if you have a claim.

When can I apply for income protection?

To apply for your income protection insurance, your insurer must make sure that you are incapacitated and incapacitated for work.

Unfortunately, disability does not have a common definition in income protection policy. Instead, there are three ways insurers assess the degree of disability:

Duty-based disability. This is the most common definition of disability. So you are eligible for the full benefit amount if your injury or illness prevents you from performing the income-generating functions of your profession. If you are still able to perform part of your work, you may be eligible for a partial benefit.
Unable to work for hours. According to an hourly definition, you qualify for full income protection if you cannot work a minimum of 10 hours per week in your own occupation. If your working hours are reduced by illness or injury, but you can still spend 10 hours or more per week on your usual occupation, your policy may pay a reduced benefit.
Means-tested disability. With a means-tested definition of disability, your insurer will classify you as disabled if an illness or injury results in a 20% or more reduction in your income. However, if you can still work and earn an income, you can get a partial benefit.

Before applying for a policy, make sure you understand how the insurer defines disability and the conditions you must meet to make a claim.

Can I cancel my policy?

Yes, you can cancel your policy at any time.

If I cancel my cover, will I be reimbursed?

New. There is no redemption value if you cancel your policy outside the cooling-off period.

Will income protection cover me if I am fired?

No, income protection insurance only covers loss of income caused by medical reasons – mental or physical, illness or injury. While layoff is something that can also cause unexpected financial problems, income protection is not the right insurance product to protect you from this risk because it doesn’t pay off in these circumstances.

Will my income insurance insurer pay?

If you are unable to work for medical reasons, yes: the policy will be paid as long as a doctor declares you incapacitated for work and you meet your insurer’s definition of incapacity for work. It is important to know how your insurer assesses this; in many cases, it will be in what is known as the definition of the profession. This means that if your illness or injury means you are no longer able to perform the main tasks required by your job, your policy will be paid out.

When the payment of income protection

How long your income protection policy pays while you are unable to work depends on the type of coverage you have. The short-term cover is paid for the fixed period agreed in your policy (eg 1, 2 or 5 years) or until you are well enough to return to work; The long-term cover will continue to be paid until you are well enough to return to work or your policy expires. Also keep in mind that your income protection only starts to pay out after the waiting period, also agreed when taking out a policy.

Income protection waiting period

This is also a good point to mention the importance of full disclosure when applying for coverage like this. Most rejected claims are due to what is called ‘misrepresentation’, in other words providing inaccurate health and lifestyle information when you apply for a policy. We will always remind you to be as accurate and honest as possible about yourself, your health and your lifestyle when you first take out the policy – that way your income protection policy is more likely to be paid if and when you need it has.

Conclusion – Is Income Protection Insurance Worth It For You?

Is Income Protection Insurance Worth It For You? It depends on what it would mean in your circumstances to lose your income for health reasons. If this could cause you significant financial hardship and you can’t live with that risk, it could be some sort of coverage worth having.

That’s all 9jaboizgist have for you today about what is income protection insurance, how to claim it, how to buy it and is income protection insurance worth it? Always bookmark the site for the best insurance and loan tips.