Australian income protection insurance policies are like jelly beans, they may be a similar size and shape, but they come in many different colours! Understanding those colours will help you get cheap income protection, which doesn’t sacrifice quality.
Knowledge is power and will ensure that you get the benefits you want in your income protection insurance, without paying for the things that you don’t need.
What is Income Protection?
Income protection insurance is best described as a monthly income benefit, which provides for you financially when you are unable to work due to injury or illness.
It is designed to provide up to 75 percent of your income (prior to disability) during a period of prolonged sickness or injury.
Types of Income Protection
Income protection insurance no longer just offers straightforward income replacement. Over the past decade insurers have improved and upgraded many aspects of the cover to include additional features such as transport benefits and/or accommodation benefits. Some of these ‘extra benefits’ you may want and others you may not, so it is common to find insurers now offer multiple types of income protection, from standard cover to premium cover.
In addition to these ‘extra’ benefits there are two other options you will need to consider regardless of the type of income protection cover you select, these are described below.
Benefit Period
The most important option you will need to select is the duration of your income protection cover. Most insurance providers now allow you to select from two options:
· 2 Years
· To Age 65
As the names suggest the first covers a period of up to 2 years of disablement. This means that you will receive up to 24 monthly payments under the policy. The cover will end when you are no longer disabled, if you turn 65 years old, if you die or at the end of 2 years, whichever comes first.
Given the benefit is limited to a duration of two years, the cost of this insurance cover can be significantly less than the alternative ‘To Age 65’ option.
Whereas 2 years is a short time span, To Age 65 benefit periods will pay a benefit up until the person is no longer disabled, turn 65 or dies. This means if you are 25, the insurer may have to pay a benefit for 40 years if you remain disabled throughout. For this reason insurance premiums are more expensive.
Which option is right for you will depend on your full financial situation and what other insurance you may have.
Selecting a Waiting Period
The other key option you will have to make on almost any new income protection insurance policy is how long the waiting period should be. That is how long will you wait after becoming disabled before payments commence?
Generally there are several different options including 14, 30, 60 or 90 days, though it is possible to find waiting periods of up to 360 days. So, although you should notify the insurer straight away, it could be 90 days before you start to receive income. In addition it is important to understand that no benefit will accrue during this waiting period, instead your benefit period will commence on the day following the waiting period expiry.
This means that you need to be financially sufficient during the waiting period. Therefore it is worth considering the amount of sick leave and other savings you have before selecting which option is most appropriate.
Note also that your waiting period will generally commence on the day your injury occurs or the date illness is diagnosed. This is important, because if you are off work for a period before seeking medical attention, your waiting period will not begin until your diagnosis has been made. In addition many policies require the waiting period be served consecutively, which means that if you ‘try’ to return to work, you may then need to restart the waiting period.