There are a number of options if you are in the market for income protection. Read on for smart steps to purchase cover.
Income Protection Insurance (IP) provides you with an alternative source of income if you are unable to work temporarily due to illness or injury. It usually pays up to 75% of your normal income and is designed to help you maintain your day-to-day living expenses during your recovery period.
While most people know that it’s important to have some kind of cover in place, it can be easy to feel slightly overwhelmed and even confused when it comes to actually comparing options and getting cover in place. Some common hurdles that can arise include:
- Whether to buy direct from the insurer, through an adviser or through your superannuation
- Whether to opt for agreed value or indemnity value cover
- Whether to choose stepped or level premiums
- What benefit limit and waiting period to select
- Whether to choose "own occupation" or "any occupation" cover.
Given the complexity of buying income protection Insurance, the question of whether to buy it yourself or to seek professional advice is an important consideration.
There are three main ways to purchase income protection insurance:
- Direct from an insurance company
- Through a financial adviser
- Through your superannuation fund
Each method has its own advantages and disadvantages that will be discussed below.
Buying direct from the insurance company
Buying your income protection Insurance direct (generally online or over the phone) is a fast, simple way to purchase cover. Direct IP policies are simple and straightforward. The underwriting process is quick and painless, so if you have an idea of the policy you need you’re only a phone call away from having cover. However, the onus is on you to understand the various terms and conditions and select an appropriate level of cover.
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Buying through an adviser
Buying income protection Insurance with the assistance of a financial adviser can help ensure you find cover that’s tailored closer to your needs. An adviser will explain terms and conditions and ask the right questions to tailor a package with features relevant to your situation. Because of this, the process will usually be more time consuming (although it can be done over the phone), the cover will be more comprehensive (and possibly more expensive) and the underwriting may take longer than if you were buying direct from the insurance company.
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Buying through your super fund
Many funds provide an income protection benefit as part of your super, with no underwriting required. As the benefit is paid from funds you’ve accumulated, there are no upfront out-of-pocket expenses. One of the main detractions for getting cover through your super is that it tends to be fairly basic, often with no choice of benefit period, waiting period or occupation definition. It is also tied to your superannuation, so if you change funds, you will no longer be covered.
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If you seek professional advice regarding income protection Insurance, your adviser can assess your situation and let you know of any additional features that could be worth considering for your policy. If you’re going it alone and buying direct, you will need to have an understanding of the different features and factor them in when comparing policies. Some of the questions you should consider include:
- Is the policy index-linked? An index-linked policy ensures the premiums and benefits increase every year to keep pace with inflation and the Consumer Price Index (CPI).
- Is it a non-cancellable policy? Can it be renewed each year without having to undergo additional underwriting?
- Does it have Guaranteed Future Insurability? This ensures you an you increase/decrease your level of cover as your situation changes if necessary without having to undergo additional underwriting.
- Is the benefit affected by other income? Do you have to use up your sick leave entitlements or forfeit any Centrelink payments before being eligible for a benefit.
- Is it ‘own occupation’ or ‘any occupation’ cover? Will a benefit be paid if you can’t perform your normal occupation or only if you can't perform any occupation for which you're suited?
- What is the waiting period? Most policies offer a number of different waiting periods to choose from, generally between 30 and 90 days. Some super funds may have a longer waiting period applied to receive a pay out, as is often the case with insurance through super (because of the additional involvement of the fund trustee)?
- How long will the benefit be paid for? Is the standard two year benefit period applied or is it less? Will it be long enough for you to fully recover and return to work?
- What additional benefits are offered? Most policies will offer additional benefits to provide extra assistance while you are recovering to cover rehabilitation and other costs that may arise.
- How is disability actually defined? It’s crucial to get a clear idea of what the insurer will define as disability as conditions can vary extensively.
There are ways to reduce the cost of your premiums with any form of insurance and income protection Insurance is no different . Ways to save when purchasing cover include:
- Select the right waiting period (anywhere from 14 days to 2 years). Long enough to reduce your premium cost, but no longer than you can afford to be without a benefit.
- Select the right benefit period (from 2 years to retirement). Short enough to reduce your premium cost, but long enough to allow you to survive financially until you can return to work.
- Be selective with the options you choose. Only choose those options which are relevant for your situation and which offer the best value for money.
- Decide between an agreed or indemnity value policy. Decide whether you need a guaranteed benefit amount (agreed value costs around 20% more) or whether a reduced amount would be sufficient if your income were lower at the time of making a claim (indemnity value).
- Decide between stepped or level premiums. Stepped premiums will start off lower but increase gradually overtime. It’s generally cheaper in the long run to maintain level premiums.
- Apply early. The younger you are the more competitive your premiums will be.
- Pre-pay before June 30. Premiums are tax-deductible if you pay before the end of the financial year.
- Quit smoking. Smokers pay almost twice the premiums of non-smokers, so giving up will not only save you money in general, but on your premiums as well.
Finally, the number one way to save, not just on your income protection Insurance, but on any form of insurance, is always to shop around. Never settle on the first or cheapest policy, but compare a number of policies from a number of different providers, because insurance is a highly competitive industry and a better deal can appear quite literally overnight.