Best Income Protection* for Workers with Fluctuating Salaries
Income protection is a type of insurance cover that is available to people who work and are earning some kind of income. Whether your income comes from a business that you own or it comes from being employed by another company, you can choose to have an income protection plan in place as long as you are working. In fact, for some people, an income protection cover plan can make more sense than a life insurance policy.
While a life insurance policy pays out money to your beneficiaries when you die, an income protection plan will pay you money in case you become ill and cannot work for any length of time. Even if you are injured or for any other reason that puts you out of work, you will be eligible to receive benefits from income protection. Therefore, if you are a working person but you do not have any dependants, then it could be more worthwhile to purchase income protection insurance rather than buy life insurance.
One of the main factors that determine the amount of cover than you can get is your income. Since insurance companies typically cover people for a percentage of their income, with the maximum being about 75%, it is necessary to be able to show proof of your income. For people who have a fixed income in terms of salaries, it is quite easy to ascertain your total income. However, if the nature of your work is such that your income is fluctuating, then it can become more difficult to decide on the right amount of cover that you need.
Types of Income Protection for Workers with Fluctuating Salaries
There are two main types of income protection plans available from most insurance providers in Australia. These are agreed value policies and indemnity value policies. Here is a look at both these types of income protection policies, which will help you to decide which one is better for you.
- Indemnity value policies: An indemnity value policy will pay out benefits according to your income at the time you make a claim. Therefore, you need to show proof of your income when you are filing for a claim and not at the time of taking the policy. This type of income protection plan works best for people who have a fixed income as there won’t be much difference between your incomes when you take the policy and in the event a claim becomes necessary. Hence, since this type of policy has cheaper premiums, it makes more sense to opt for the indemnity value policies.
- Agreed value policies: In an agreed value income protection plan, your cover will depend on your current income. Hence, you need to show proof of your current income at the time of buying the policy and no such proof will be asked for if and when a claim arises. Since the payouts in this type of policy are fixed, it is best for workers with a fluctuating salary. You can use a good year when you have made more income to lock in the benefits of your income protection plan. Hence, even if your income fluctuates and is much lower at the time of filing a claim, you can still benefit from the higher payouts that were locked in at the time of buying the policy. Yes, the premiums in this type of income protection plan are typically higher than other policies, however, it can still make sense to opt for it since you have a fluctuating income and you can have the peace of mind of locking in higher benefits.
When you are selecting an income protection plan, you should keep certain things in mind. The first thing is the amount of cover that you need. If you have a fluctuating income, you should choose a cover based on your maximum income in a year rather than your minimum income earned in any year. This will help you to ensure that you get a benefit payout that will enable you to live your life comfortably, should you be unable to work in the future.
Also, if you want to lower the cost of your plan, you can choose to increase the deferment period. The deferment period is the amount of time that passes from the time you cannot work till the time your policy payments kick in. For instance, you can choose a deferment period of 2 months. What this means is that your benefit payments will only begin if you have been unable to work for a full two months. Therefore, if you choose a longer deferment period depending on your savings and how much time you can go without earning an income, you can lower the cost of your income protection policy.
Some insurance providers also have specialised income protection plans for workers with fluctuating salaries. Hence, you should check out the policies available from several providers before you make your final decision.