What do I need to know about income protection insurance?

Income protection insurance can be a great safety net. It is sometimes known as salary continuance and provides you with assistance to cover any expenses while you are unable to work for a couple of months, as a result of injury or illness.

Here are some of the commonly asked questions about this form of insurance, so you can go into it with your eyes open.

Do you need income protection insurance?

Income protection is important to consider if you rely on your salary to pay bills or support other commitments. It is particularly useful for those who are self-employed or own a small business, or professionals whose business relies on their personal abilities. 

For single people with no dependants, this could be an alternative to life insurance, providing you do not need to worry about the costs if you were to die.

What types of cover are there?

There are two main types of income protection insurance: Indemnity and agreed value.

What are indemnity value policies?

Provided by your superannuation funds, indemnity value policies mean your premiums may be deducted straight from this account.

Something to be aware of is that indemnity value policies may be more expensive and you may be required to verify your income when you make a claim. Your benefit may be adjusted accordingly. If your salary fluctuates as a result of maternity leave, part-time work or unemployment, you may find this could be an issue.

However, those policies provided through your superannuation are often the cheapest, although they offer less in the way of flexibility and have fewer features. 

What is agreed value insurance?

Choosing an agreed value policy is a slightly more expensive option but means you will be aware of the amount you will receive.

It is calculated taking into account your income at the start of your policy and will not be affected by any fluctuations down the track. These policies may be better for those with a fixed income.

How can you choose the best policy for your needs?

There are many factors to consider when choosing an income protection policy, as the level of coverage may depend on the contract you select.

Most policies will cover around 75 per cent of your gross wages, for a maximum time period. This could be a year, two years or more.

The longer your benefit will be paid for, the higher your premium will be. There is also a waiting period to consider. This is the amount of time you will need to wait until your monthly benefit starts being paid, whether it be 30 days, 90 or longer. The length you decide on may also depend on the amount of savings you already have set aside. 

Another factor that may change the amount you pay in your premium is whether you choose to step or level your policy. Stepped premiums usually start off cheaper but increase every year you get older, while level premiums stay the same throughout their duration, which means that in comparison they may be more expensive at the start than stepped premiums. 

The choice you make may depend on what suits you. Would you prefer to control your costs over time? Level premiums are likely to be cheaper in the long run.

It is also essential to reevaluate your policy if your income has changed at all, as this is a great way to ensure you have the right level of cover for your needs.

How much cover do you need?

The amount of cover you require depends on the level of salary you want to insure. 

To figure out this amount you will need to do some calculations to work out what your financial commitments are - how much do you need to meet your mortgage payments and other debts? Are your required to support a spouse, partner, children or any other dependents?

You will also need to ensure you can maintain your assets and investments. For example, if your home needs repair or a rental property is unfilled.

What should you ask when you organise a policy?

It is best to do a comparison before deciding on a particular policy.

When you are researching your options there are a few questions to ask, including what is covered under the policy, how much you will be paid after a claim and how the insurance premiums will cost both now and at a later date.

This means asking how inflation will affect your policy. You can ask for a policy that is index-linked so you can include this change in your budgets.

Before you sign up, you may want to ask what happens if your circumstances change, whether it be your health or other factors. You can also consider a non-cancellable policy so that any changes won't mean you are refused cover or that your premiums are raised on renewal.

A policy with guaranteed future insurability is also recommended as this can easily let you make changes to the level of cover received without the need for future underwriting.

This is particularly important if you are considering changing your circumstances, such as buying a house or having a child.

Posted by Richard West.