If life and work are ticking along, you’ll be so focused on your business that the last thing you’ll be thinking about is what would happen if you couldn’t work.
However, the best time to think about the spectre of illness or injury, is while you are healthy. The healthier you are, the cheaper insurance premiums are going to be.
But do you even need insurance? Let’s look at income protection, how it works and whether you should get it.
Income protection insurance, also known as salary continuance, can help you manage your expenses if you are unable to work for a certain amount of time if you are sick or injured.
When purchasing income protection, consider what other types of life insurance you might need as well, such as life cover and total and permanent disability cover.
Income protection gives you a steady source of cash in case you get injured or sick and cannot work.
This means you can focus on getting better instead of how you’re going to pay the bills.
Income protection insures you for a set level of income, and will pay you until you can return to work or for the agreed period – whichever is sooner.
Income Protection cover is available for up to 75% of your monthly income to provide an affordable level of financial protection should you fall ill or be injured.
It is issued by life insurance companies and the insurer can’t cancel the policy as long as the policyholder continues to pay their premiums. The provider also can’t adjust the terms of the policy once you have taken it out.
Income protection:
Life and income cover offer protection for different reasons and both are worth considering. Life cover provides a lump sum benefit in the event you pass away or suffer a terminal illness. Income protection provides an ongoing monthly benefit while you are unable to work for an extended period.
WorkCover is a nationwide initiative where all employers pay the government a premium in case one of their employees is injured at work. The employer can then make a claim and WorkCover will pay out compensation and other benefits, but only if the injury occurred at work.
Income protection insurance replaces income lost through your inability to work due to injury or sickness.
It is especially suitable for self-employed people, small business owners or professionals whose business relies heavily on their ability to work.
If you’re dependant on your income for your livelihood (like rent, mortgage, groceries, and bills) then it’s worth considering income protection.
Each income protection policy has its own definition of disability and range of benefits.
Many super funds offer income protection. To see what cover is available:
Premiums are the amount you pay for your policy per month.
The cost is influenced by a number of factors, including age, gender, smoking status, and occupation. More manual occupations generally have a greater risk of illness or injury so premiums are more expensive for such occupations. For example, premiums can vary from around 40 AUD a month for a 27 year old non smoking male accountant to 626 AUD for a 52 year old non smoking female commercial cleaner.
Income protection is more expensive for females because women are more likely to claim than men, and are more likely to remain off work for a longer period of time.
Premiums can be stepped or level. A level premium stays the same over time whereas a stepped premium is cheaper initially, but gets more expensive over time.
Income protection insurance premiums are generally 100% tax deductible, although not if through your Super fund. Check with your accountant or a certified tax specialist to assess whether the policy you want to go for will be tax deductible.
You will not receive benefit payments immediately. The waiting period is the number of days you have to wait before payments begin, and are typically between 30 and 90 days.
If you’re involved in an accident, the waiting period usually begins on the day your injury occurs, while policyholders who fall ill, will begin their waiting period on the day their sickness is diagnosed.
Exactly which waiting period is right for you will be determined by how long you think you could manage financially without your regular stream of income.
The benefit period defines the maximum length of time you’ll receive payments.
Benefit periods are typically two or five years.
You can also choose to receive payments up until a certain age (usually 65).
Agreed value cover is more expensive and lets you set your own benefit amount.
It’s a great option for people with fluctuating income who don’t receive a stable salary, such as sole traders and freelancers.
Indemnity value is cheaper. It sets your benefit amounts based on your income at the time of a claim.
If you’re on a stable monthly salary, this is probably fine.
You can get quotes online. Try Finder or Compare the Market.
You will need to provide:
Alternatively, if you don’t want to shop around yourself, you can consult an independent adviser, who can look at all the policies on offer and choose the one best suited to you.
You can also ask your Super fund about taking out cover through your superannuation. Income protection cover through your superannuation fund is generally cheaper than a standalone policy, but doesn’t offer as much choice and flexibility as other insurance providers.
If you need to make a claim on your income protection policy, you will have to provide evidence of your illness or injury. Ask your insurer exactly what they need so your claim gets processed as quickly as possible.
The income protection payments you receive will be for the period you are unable to work, in line with the policy.
You will likely need to provide:
In order to qualify for an income protection benefit, your insurer needs to be satisfied that you are disabled and unable to work.
But there isn’t a single definition of ‘disability’ across all Australian income protection policies. Instead, there are three different definitions that insurers use to assess degrees of disability:
Duties-based disability. This is the most commonly used definition of disability. If it applies to your income protection policy, you will qualify for the full benefit amount if your injury or illness prevents you from performing the income-producing duties of your occupation. If you are able to perform some, but not all, of the income-producing duties associated with your occupation, you may be eligible for a partial benefit.
Hours-based disability. Under an hours-based definition, you will qualify for a full income protection benefit if you are unable to work in your own occupation for at least 10 hours per week. If your working hours are reduced by illness or injury, but you are still able to perform more than 10 hours a week in your usual occupation, your policy may pay out a reduced benefit.
Income-based disability. If an income-based disability definition applies to your policy, your insurer will classify you as disabled if illness or injury has led to a reduction in your income by 20% or more. However, if you are still able to work and earn some income, you will receive a reduced benefit amount.
Before you apply for a policy, make sure you’re aware of how the insurer defines disability and what conditions you will need to meet to qualify for monthly income protection benefits.
Should I use an adviser or buy directly from an insurer?
If you choose to use a financial adviser, they can compare the market for you, finding the widest range of options. They can also help tailor the policy to your needs, explain it all to you and walk you through the application process. Of course, they will take a fee and some time.
If you want to buy income protection insurance directly from an insurance company, use a comparison website to shop around for policies. Most insurers can provide a quote via their website or by phone. If you’re doing it on your own, make sure you declare all pre-existing conditions and read the fine print to avoid being rejected if you make a claim.
Should I get cover through super?
If you get income protection through your super, the benefit is paid through the super funds you have accumulated, so there are no up-front expenses. However, you don’t tend to have as much choice with policies offered through super. There’s often little or no choice of waiting period, benefit period or definition of occupation. The other down-side is that if you change super funds, you’ll lose your cover. It will also be eating up your retirement funds, however, if it’s difficult for you to pay premiums, it’s a cheaper option to pay through super.
Can I get long-term cover?
Income protection is designed for temporary relief, but you can get policies that last for 5 years of up to 65 years of age. It’s easier to qualify for these policies when you’re younger. When shopping for policies, look at the maximum benefit period. Of course the longer you want to be covered, the more expensive the premium. You need to balance out the features you need from a policy with what you can sustainably afford over time.
What is day one accident cover?
Day 1 accident cover is an option which allows you to access benefits early. This form of cover gives you protection in case you need money during the initial waiting period. It’s an option on some policies, so check the individual policy and insurer. This feature can also be called ‘Accidental Injury Option’, ‘Accident Benefit Option’ or ‘Day Four Accident’.
Can I apply for cover if I am already ill or injured?
No, you can’t apply for a policy to cover your current situation. However, you could apply for income protection insurance for future illness or injury, although insurers might define your current condition as a pre-existing condition which will mean higher premiums. It will all depend on the nature of your current situation.
What is ‘the minimum working hours required to receive cover’?
‘Minimum working hours required to receive cover’ is a common condition in policies. It defines your obligations in terms of hours you need to work each week in order to be eligible for cover.
If you’re healthy, it’s time to take out income protection!
Income protection is important if you have children, are planning on having children, or have other family depending on your income. It’s particularly relevant if you are self employed. Small business owners may have other types of insurance to consider to protect their business.
If you are considering a policy, decide whether you want it through your super or not. Specify the terms you are after, especially with regards to waiting and benefit periods, and shop for the best rates. Balance out the features of a policy with what you can afford to pay. There’s no point getting extensive cover if you can only afford the premiums for a few months!
If you are about to decide on a policy, make sure you read the fine print and consider how any other relevant payments, like Centrelink, or your tax situation will be affected.
Be mindful that if you are self employed, a small business owner, have dependents and/or are the primary income earner in your family, it would be wise to take out Life Insurance too.
If this article was helpful, head to the QuickBooks Resource Centre for informative articles that take the guessing game out of running a business.
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