Don't go without income protection cover just because your salary fluctuates month to month. Here's how you can get the cover you need.
Workers with fluctuating salaries can really benefit from income protection insurance. This type of insurance:
- Pays a benefit if you're sick, injured or unable to work
- Lets you cover essential living costs when you're not working
But workers who aren't on fixed monthly incomes can easily end up with smaller benefit payments than they need. This is because many policies calculate your benefit based on your income at the time of an injury or illness. If you suffer an illness or accident in a slow work month you'll lose big time.
This guide will help you avoid reduced benefit payments and find a policy that works.
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Why should workers with fluctuating salaries consider income protection insurance?
Income protection insurance pays you a benefit if you’re unable to earn an income due to injury or illness. Unlike lump sum benefits, it’s paid monthly just like an income.
Workers with fluctuating salaries may already experience times of insufficient income. Missing out on a period of higher earnings due to injury or illness could make it hard to catch up, even once you return to work. Having income protection insurance can help you to maintain your level of income even if you're unable to work.
What types of insurance are available for workers with fluctuating salaries?
When looking at income protection insurance there are different levels of cover. These are:
- Accident only. Only covers up to 75% of your income if you have an accident and can’t work. Doesn't pay a benefit for illnesses.
- Basic income protection. Covers up to 75% of your income if you can’t work due to an accident or illness. The benefit is based on an agreed value or your regular income at the time of the accident. These policies cover most common illnesses and conditions. You don’t need to be injured or off sick from work to claim under these policies.
- Premium income protection. Offers the same income protection as basic income protection insurance, but with some additional benefits such as a lump sum death benefit, rehabilitation benefit or loan cover benefit.
Other than income protection insurance, workers with fluctuating incomes might want to consider:
- Life insurance. With life insurance your family receives a lump sum if you die or are declared terminally ill. The payout will be given to your family or chosen beneficiary.
- TPD insurance. A “living” or “disability” policy pays a lump sum benefit if you are injured and become totally and permanently incapacitated. It’s important to check the exact wording of these policies. Sometimes they will only pay a benefit if you are unable to return to any form of work, rather than to your usual or trained occupation.
- Trauma insurance. You receive a lump sum payment if you are diagnosed with a condition defined on your policy.
How do insurers classify workers with fluctuating salaries?
Insurers classify workers on the nature of their job, not the title or salary. For workers with fluctuating income, it depends entirely on the type of work you do. Regardless of the classification, casual, contract and seasonal workers are ineligible for income protection insurance.
However, if you’re employed full time and your income fluctuates due to commissions or increased work load during peak seasons, then you can get income protection insurance. Insurers broadly separate people into five categories:
You can learn more about how insurers classify occupations and find every occupation listing here.
Agreed value cover: an essential option for workers with fluctuating salaries
Income protection policies come in two forms: agreed value or indemnity value.
An indemnity value benefit will pay a benefit based on your income at the time of a claim. This is obviously not ideal for people with a fluctuating income as they might need to claim during a period of reduced pay.
By choosing an agreed value policy you will receive a fixed benefit, regardless of how much you are earning at the time of the claim. Ideally, you should set your agreed benefit based on your average earnings. You can set it higher, but you'll pay more in premiums.
Learn more about the difference between agreed and indemnity value cover.
How much does income protection insurance cost?
The cost of your monthly premiums varies by the type of job you do and your monthly income. Since workers with fluctuating salaries work in all kinds of industries it's impossible to give specific costs. The following quotes are taken from finder's comparison engine and are very rough guides only.
*These quotes are examples only and are based on a non-smoking 35-year-old male graphic designer residing in NSW. Your actual quotes may differ from those shown. These quotes are accurate as of June 2017.
How can I find the right income protection insurance as a worker with a fluctuating salarie?
Here are some general considerations for workers shopping around for income protection insurance:
- Benefit Period. The benefit period is the amount of time you will receive payment from the insurance. You can usually select a period up to five years, with one or two years being the most common.
- Waiting period. The waiting period is the time you must wait before receiving a benefit. You can usually choose a waiting period that suits you between 30 and 90 days.
- Stepped vs level premiums. Stepped premiums increase each year you hold the policy. Level premiums are fixed at the beginning of the policy and stay the same. A stepped premium will start off less than a level premium, then will gradually increase until it is more expensive. If you can afford level premiums to begin with, it will probably be cheaper in the long run.
- Maximum benefits. Check the maximum benefit allowance before taking out a policy. Some insurers will only cover up to a maximum of $10,000 per month. If you do decide to get an indemnity value policy, it is important to make sure you won’t be limited by the maximum benefit amount.