Five Factors to Consider When Thinking About Your Income Protection Insurance Needs
What if you’re injured, either in an accident or on the job? What if something happens that leaves you sick or disabled and unable to work?
This sort of thing can be a life-changing event that will have a direct impact on your household’s future income.
Thankfully, Income Protection cover can help protect you financially in these circumstances. This type of insurance can cover up to 75% of your pre-tax income for the applicable benefit period under your policy (which is often for 2 years, or until age 65).
Generally, the pre-tax income used as the basis for calculating your benefit is the income during the 12 months prior to your claim. But you need to be certain that you understand everything about it when calculating how much you might need.
These are key factors to consider.
Factor #1 – The Number of Policies Available
There are many life insurance providers in Australia and each one uses a different underwriting process. This means that each has its own criteria for accepting your policy application. Plus, there are likely to be different terms regarding how much they pay in the event of a claim.
This means that it’s unwise to go for the first policy you find. You should consider comparing a number of the available policies and think about what’s right for you.
Furthermore, don’t assume that the policy you see on a provider’s website is the only one they offer.
First, check with as many providers as possible. This is likely to give you an idea of some of the differences between each provider’s policies. Consider NobleOak’s income protection cover – we’re the five-time winners of Canstar’s Direct Income Protection Award for Outstanding Value.
From there, speak to the provider directly to find out about the features of their income insurance policies. This will give you information to help you to choose the one that works best for your specific circumstances.
Factor #2 – Understand the Potential Exclusions
Providers may also provide different exclusions in your policy. An exclusion is a policy condition that prevents payment of a claim even if you’re unable to work.
Typical exclusions for income protection insurance can include the following causes leading to injury or illness:
- Self-inflicted harm that prevents you from working
- Attempted Suicide
- Engagement in any criminal activities
- The consumption of alcohol or drugs
Some providers may also have exclusions for regular pregnancies and for situations resulting from mental health issues. Sometimes, certain excluded conditions are based on your specific application (for example, if you have certain medical conditions) and are advised to you before you decide to accept the terms of cover which may be offered.
It’s always wise to discuss these exclusions with your policy provider before taking out your cover. You may wish for a policy without certain specific exclusions. However, such a policy may cost more or you may not be offered cover without the exclusions, as it creates more risk for the insurer.
Factor #3 – The Expenses That the Insurance Covers
You may consider that in your particular situation, you don’t require the maximum 75% of income coverage. If that’s the case, you have the opportunity to reduce your premiums.
First, figure out how much 75% of your pre-tax wage is. Using this as your baseline, write a list of all your essential household expenditures. These include things like your mortgage, utility bills, and personal loan payments. You may also consider fees related to schooling as essential. Of course, groceries and other monthly expenses should be included in this list, too.
Add up your monthly costs for each essential and compare it to the 75% income figure. If the expenses are substantially lower, you may be able to get by with a smaller insured income benefit. Depending on your needs, you could choose to apply for coverage for less than 75% of your income.
Factor #4 – Understand What Events May Lead to a Claim
Income Protection cover only applies in the event of an illness or injury you suffer. This condition must prevent you from being capable of working, either temporarily or permanently, for you to be eligible to make a claim.
This means that you won’t be able to claim if you’re fired from your job. This is also the case should you choose to leave of your own accord. Income insurance protects you from the direst of circumstances. If you’re still capable of working, your policy won’t come into effect.
Upon lodging a claim, your insurer will ask for proof of your income. Typically, they look at the last 12 months of income, rather than for your income at the time of signing the policy.
Factor #5 – The Waiting and Benefit Periods
Upon lodging a claim, you will undergo a waiting period before your income protection benefits become payable. This is likely to be 30, 60 or 90 days, depending on your policy terms. Applying for one of the shorter waiting period will, if your application is accepted, likely increase the cost of your income insurance compared to if a longer waiting period applied.
Your benefit period determines how long you will receive money from the insurance provider if you make a claim. Again, this varies depending on your policy. You may choose a short benefit period (such as two years), which usually means you pay lower premiums. However, this also means that your benefits will end at the end of the two years even if you’re still unable to work.
A longer benefit period (such as to age 65) may cost more in terms of premium, but will provide you with income protection benefit payments for a longer period whilst you remain unable to work due to the injury or illness.
Making Your Choice
Choosing your Income Protection cover is not a decision to take lightly. There are dozens of providers in Australia, all of which have different terms and policies.
Make sure you talk to as many as you can before making a decision.
When it comes to calculating your costs, consider how much income protection cover sum insured you need. Do you really need 75% of your income? Remember that you have to consider the future as well as the present here. Also, choose your waiting and benefit periods wisely.
You can reduce premium costs with a longer waiting period or shorter benefit period. But are you sure that you can support yourself properly with a longer waiting period or shorter benefit period? You need to think these things through and consider your particular needs and situation.
At NobleOak, we’re happy to provide you with information to help you with your decision. Our award-winning team will be able to answer any questions you have about our products.
But of course, you still have the big one…
To insure or not to insure?
That is a question that only you can answer. You may choose to get some professional advice, or to carefully consider your own needs and circumstances and deal directly with a Life Insurer like NobleOak who can provide you with general advice and product information.
This is general information only and does not take into consideration your individual circumstances, objectives, financial situation, or needs.