Case study: Income protection in a real life situation
Income protection was able to help Germaine at her most vulnerable.
1. Diagnosed with cancer
At 56, the legal professional was diagnosed with breast cancer forcing her out of her job and was left to treat cancer without any income.
2. Income protection at a difficult time
Fortunately, Germaine had an income protection insurance policy that could provide a monthly benefit of up to 75% of her income. Thanks to this, she was able to take time off, recover and still pay for her ongoing living expenses.
3. Eventually able to return part-time to work
After steady recovery, Germaine was able to return to work in a part time arrangement. A feature of her income protection insurance allowed her to switch to a 'partial benefit' to cover the days where could no longer work.
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.
You should view WorkCover as the minimum amount of insurance cover you need
While all Australian employees are covered under WorkCover, that doesn't make income protection insurance obsolete. You should view WorkCover as the minimum amount of insurance cover you need. Potential benefits are not always guaranteed by WorkCover. The table below outlines the differences:
Cover for injuries and illnesses that occur during work
Cover for injuries and illnesses that occur outside of work
Cover for rehabilitation expenses
Cover for elective surgery
Cover for your spouses accomodation expenses (if they need be with you away from home)
*Make sure you check with your provider. This may be an included feature or an additional option.
Provides an ongoing benefit payment of 75% of your monthly income if you suffer a serious illness or injury - regardless of whether
Will cover injury and illness that occurs both at work and outside of the workplace.
Provides additional benefit payments to cover rehabilitation expenses.
You can choose to have your benefit paid for 2 years, 5 years or to age 65.
You are generally entitled to compensation if you suffer an injury, disease, illness or psychological injury through the course of your work.
You may be entitled to compensation if through the course of your work, a pre-existing condition reoccurs.
Workers Compensation provides cover for reasonable medical, surgical and hospital care for work-related injuries.
A lump-sum payment may be provided for permanent impairments.
Premiums are funded by the employer.
Benefit payments will usually last for a minimum of 13 weeks at 90% of the workers Annual Weekly Earnings (AWE). From 13 to 26 weeks, this amount is reduced to 80% of the AWE.
You may not receive payment benefits when you are first injured, which can be when you need them the most to cover medical bills, mortgage repayments and other immediate expenses.
Although we don't believe price is the most important thing to consider, once you understand what cover you need it's good to see who offers competitive premiums. Here's an idea of how much it costs to get income protection for an annual salary of $45,000.
TAL Accelerated Protection
Asteron Life Complete
Zurich Wealth Protection
*Prices quoted above were taken from finder's quote engine. The quote was based on a 35-year-old, non-smoking male office worker. Quotes are accurate for March 2018 and are subject to change. Any weekly premium mentioned is for reference only as most providers offer yearly, monthly and fortnightly payments.
As you can see, there is a lot to consider when taking out income protection insurance. The following are a few simple tips to help you navigate your options:
Ask for all the details. Don't be afraid to ask question after question of your insurer until you're sure you've got all the information. This means knowing exactly what is and isn't covered, how much your benefit amount will be and what your premiums will be now and in the future.
Keep up with inflation. You can look for a policy which has index-linked premiums and benefits, so that you know that your benefit amount will always keep up with inflation costs.
Look for a non-cancellable policy. A non-cancellable policy means that your insurer won't reassess your health or circumstances each time you renew your policy, so you won't be refused cover or have a premium loading added. You can also take out a policy with guaranteed future insurability so that you can increase your level of cover without your application needing to go back to the underwriter.
The effects of other income. Be aware that offset clauses can allow your insurer to reduce your benefit payout if you are receiving income from another source, such as sick pay from an employer or Centrelink benefits.
Know the conditions of insurance through your super. When you take out income protection insurance through your super, the policy is between the trustee of the fund and the insurer. Therefore, you need to make sure that both the trustee and the insurer know who your nominated beneficiaries are so the benefits go where they are needed.
Make sure you're happy with the waiting period and benefit period. The waiting period is the time you have to wait before you receive your benefit payout after a successful claim. The waiting period you choose will depend on how much you have in savings, and how long you can survive financially on other benefits, such as sick leave. The benefit period is the length of time you receive the benefit for, whether it is for two months, two years or until retirement.
Own occupation or any occupation. Make sure you know whether you will be expected to return to any job you are able to perform after an illness or injury, or if you can continue to receive a benefit until you are able to return to your own occupation.
Understand the terms and conditions. As boring and time consuming as it is to read the fine print of an insurance policy, you want to make sure you understand all of the terms, inclusions, exclusions and conditions of your policy, so that you know you have the coverage you want and need. You don't want to be paying premiums for a policy, only to find out at the time of a claim that you're not eligible for benefits.
One of the most important steps when comparing policies is to find out when you will actually be covered. Providers will class disabilities as either partial or total and permanent. The exact definition of total disablement will vary among insurance providers but most will use the following characteristics to approve a benefit payment:
You suffer a serious accident or illness.
You are unable to work due to suffering a serious accident or illness.
You experience a decrease in income following a serious accident or illness.
Total and permanent disabilities (this is where TPD insurance comes in)
Death (this is the job of life insurance)
Redundancy (unless policy is combined with a redundancy plan)
What's considered 'unable to work'? Three disabilities to understand
This is where it can get confusing. In this definition of "unable to work" or "disablement", life insurance companies use these different definitions of disability;
You are unable to perform one or more important duties in your role at work because you have suffered an illness or injury.
Such duties may include manual work, supervision, desk work, meeting with clients or presentations.
You have suffered a reduction in your income of 20% or greater because of an accident or illness.
This means you are unable to perform the duties of your own occupation a certain number of hours per week (usually 10 hours) after suffering a serious accident or illness.
In this case your income and in turn your benefit amount, are assessed at the time you make a claim. Therefore, when you make a claim you will also need to provide financial documents, so if you income has reduced since you applied for the policy, your benefit will also be reduced, however, if your income has increased, your benefit will too. An indemnity policy can also often be around 20% cheaper in premiums than an agreed value policy, and can be ideal if you are in a steady job, where you receive regular pay raises and b
Some more questions you might have about income cover
If you have become ill or injured and are unable to work and earn an income, you will not be able to obtain income protection insurance to cover you for the current situation. However, you can still apply for income protection insurance for future events. Since your health is taken into consideration when you apply for income protection insurance, you may find that your current illness or injury may become a pre-existing condition. This means that you may have to pay higher premiums for your coverage, although this can depend on the nature of your condition or the type and level of injury.
All insurance approvals and premiums are assessed based on your level of risk, and the higher your risk level, the more you have to pay in premiums. In some cases, it can be harder to secure cover. Being classified as a standard risk means you have a low-risk job, lifestyle and health factors. High-risk cover can be more expensive for people with riskier jobs and leisure activities.
This is a condition set by each insurer, requiring that you work a certain number of hours each week to be eligible for cover.
Unfortunately, the maximum application age for most income protection policies in Australia is 64 (age plus next birthday). It may still be worth speaking with an insurance consultant about other insurance options that would be worth considering for your situation.
If you know what you are looking for in a policy and are keen to get cover in place straight away, you may wish to take out cover with a direct insurer. Cover can generally be put in place online or over the phone and on the same day provided you meet the provider's entry requirements and no additional information is required.
This is the maximum length of time your policy will pay you an income if you are unable to work. Typical benefit periods are 2 years, 5 years or to age 65, and the longer the benefit period, the higher the premium.
Each insurer will have their own specific definition, but in most cases you can be classified with a duties-based disability where you are unable to perform the core tasks of your job, an income-based disability where your income is reduced because of you disability, or an hours-based disability where the hours you are able to work are reduced because of your disability.
In general, most income protection insurance providers will offer to cover your average salary up to 75% at most. However, you may find other insurers that may offer additional cover in excess of up to 15%. It is important to note that the additional amount must be used as a superannuation contribution. This means, you will receive the 75% benefit amount and the remainder will be paid into your super fund. It is unlikely that you will find insurers who offer to cover 100% of your income, as there should be an incentive for you to return to the workforce once you have recovered.
Policies will usually pay out up to 75% of your regular gross income.
Income protection insurance generally doesn't provide cover for redundancy, although there are a number of general insurance providers that do provide cover for redundancy in Australia.
Waiting periods (the time you must be unable to work before you start receiving a payout) range from 14 days to 2 years. The shorter the waiting period, the higher the premium. The cause of your sickness or injury does not need to be work related in order to receive the benefit.
This is the maximum length of time your policy will pay your income if you are unable to work. Typical benefit periods are 2 years, 5 years or to age 65, and the longer the benefit period, the higher the premium.
No. Income protection will not provide any benefit payment during pregnancy. There are a number of insurers that will let you waive your premium during pregnancy.
Generally speaking, the older you are, the more likely you are to suffer an illness; therefore, the premium you pay will be higher. Smoking is also seen as an added level of risk and usually sees your premium rise.
A stepped premium is one which starts out as very affordable and increases each year as you get older, while a level premium stays the same though out your policy and only increases to keep in line with inflation.
Premiums can be based on the type of occupation the person has and the perceived level of risk. A manual or blue-collar worker such as a miner might be required to pay a higher premium compared to an office worker, who is considered less risky.
¹ AIHW (2008) Cancer in Australia: an overview 2008, Cancer series no. 46, Cat. no. CAN 42, Canberra
² Fabrizio, E (2007) Australia & NZ Disability Income Experience www.actuaries.org/IAAHS/Colloquia/Cape_Town/Walker_-_Income_protection.pdf
³ AIHW (2008) Australia’s health 2008, Cat. no. AUS 99, Canberra
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