How to find the right cover for your needs
Income protection insurance can pay out benefits if you're unable to work. For managers and executives, the challenge can be finding a policy with limits that are high enough. Policies will typically pay out 75% of your usual income, up to a set limit depending on the policy.
If you are a shareholding director, or non-shareholding executive of a company, it can be worth specifically looking for a policy with high limits, and other specific features to make sure you're able to keep up with expenses if an injury or illness prevents you from being able to earn an income. This guide explains how to find the right policy for yourself and your business, starting with the basics and moving on to some of the more in-depth options to consider.
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What to look for in a policy: The basics
Depending on your usual income, your existing savings and expenses and how much you're prepared to pay in premiums, a different policy may better suit your needs. The three main features that define your cover include:
- Limits: These are the maximum amounts a policy will pay per month. Policies will often have set caps based on your usual income. For example, if you earn $160,000 per year you may be limited to income protection insurance that pays out $10,000 per month, or you may find a policy with limits of 75% of your usual income or a set amount, whichever is higher. Larger amounts naturally attract higher premiums, so it's worth considering how much you will actually need in line with your essential and non-essential expenses, and other forms of insurance.
- You can find policies in the comparison engine with limits of up to $30,000 per month, accessible if you earn at least $480,000 per year.
- Waiting periods: This is how long you need to be unable to work before you can make a claim. The lower end can be around 15 days, while the upper end can be as high as a year, or even several years. This decision has a significant impact on your premiums, with shorter waiting periods attracting higher costs. Value for money might lie in matching waiting periods with your savings and necessary expenses. Consider it in line with sick leave for which you are eligible and your savings. For example, if you can only afford to be out of work for 30 days before you have to start making damaging sacrifices then that might be the right waiting period for you.
- You can usually choose your own waiting period, within a wide minimum and maximum amount that can vary depending on the insurer and policy.
- Benefit period: This is the maximum amount of time a policy can pay benefits. You will often be able to choose periods of 2 to 5 years. Policies will generally stop paying benefits when you return to work or are able to return to work, or when the benefit period runs out, whichever comes first.
- Some policies will have set benefit periods, but many will also let you choose your own with set boundaries.
Personal income protection and tax
Premiums paid for income protection insurance policies (when held outside of superannuation funds) are generally tax deductible. However, income protection payments will generally be taxable.
These are all basic features of personal income protection insurance. If you own the business, are a managing director or are a board member it's also worth considering some of the business insurance income protection options available, as well as the detailed policy features that can affect your personal cover.
How much does cover cost?
The cost of your income protection insurance is determined by factors including your your sum insured, whether its a set figure or based on your typical earnings, your age and the nature of your job. Managers and executives will typically fall into the white collar job category which tends to have lower premiums than more physically intensive occupations for two reasons.
- The "unable to work" barrier is higher than with more physical occupations. This means you are often able to return to work even after suffering injuries or illnesses that would be disabling for someone in a more physical job.
- You are less likely to become injured, or suffer from certain chronic health issues, that are more common for people in physically intensive jobs.
While executives and managers will typically land in the lowest-risk white collar job category, it will depend on your actual day-to-day responsibilities rather than just job title. A construction manager who attends job sites and does physical labour in person, for example, will generally not qualify for the white collar category.
For example, as a 40 year old non-smoker in a low risk managerial job category, you can expect to find the following rough monthly premiums with a fairly high-end comprehensive policy, depending on your usual earnings and sum insured:
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A 50 year old or a smoker, meanwhile, can expect substantially higher premiums. Your premium structure will also play a role, and it can be worth considering the different options available.
- Stepped premiums: These will increase significantly over time and are directly based on your age or length of time you've held the policy. For a long term policy, especially when you're getting income protection insurance as part of a combined life insurance policy, it can be a good idea to avoid these.
- Level premiums: These typically start off higher than they would for a younger person getting a stepped premium policy, but will remain fixed over time. This does not mean they won't change at all, but instead that they will not keep directly stepping upwards based on your age or policy duration. Your premiums will still change based on your income or sum insured.
- Hybrid premiums: This is a combination of the other two options, and is not available from all providers. This premium structure will start off stepped, and but eventually caps and turns into level premiums after a certain length of time.
See a more detailed breakdown of the cost differences between premium structures and how they change over time. It's important to remember that your costs will also depend on the policy, the provider and your chosen options.
What to look for in a policy: The detailed options
There are some specific important features of income protection insurance, generally included automatically. It can be a good idea to make sure your policy includes the following:
- Indexation for inflation: Your sum insured will automatically increase to keep up with inflation. This may not be necessary if your sum insured is naturally based on a percentage of your previous year's income.
- Worldwide protection: Covers you even if the disabling injury or illness was suffered while overseas
- Recurrent benefits: If you return to work after claiming income protection benefits, but are re-disabled as a result of the original injury or illness the waiving periods will be waived.
- Family care benefit: Additional benefits may be paid to compensate for a family member's loss of income if they need to take time off work to care for you while disabled.
There are also some potentially important benefits which are not typically included by default, but can be selected as optional extras at increased cost. You may want to include:
- Rehabilitation benefits: Pays benefits to help cover the cost of approved rehabilitation procedures, such as physical therapy or modifications to your workplace.
- Increasing claims option: Income protection benefits paid will increase over time in line with the CPI, to make sure the payout remains adequate. This can be important if you've selected a longer benefit period, such as 5 years, with your policy.
- Business expenses: This option can cover specific business expenses if you are self-employed or a business owner. If you are also taking advantage of specific business insurance options it may not be necessary.
These are not the only options available and learning more about all of them is a useful step to take before comparing cover. An alternative, or additional, option to consider is finding insurance through your business.
Getting income protection insurance through your business
Keyman insurance policies can be used as a form of business income protection insurance. In basic terms, it's like a life insurance policy, that can include income protection, taken out by a business on a person. If you are a sole trader, business owner or other executive you may be able to nominate yourself as the keyman insurance beneficiary. This means the policy would pay out benefits, to the business, if you are die, become disabled or are otherwise unable to contribute.
This option has a range of additional complexities and is not an effective substitute for personal income protection, but it can help make sure your business can continue without you. For example, if you are still able to earn some income from your business while disabled and not directly working for it, such as with share dividends, then a keyman business insurance policy taken out on yourself may be able to help accentuate your personal income protection insurance, as well as directly support your business.
How Dividends can Affect Your Benefits
The maximum amount of cover you are allowed is generally based on your income, and this may or may not include income from dividends. When you involve dividend payments you may have the additional flexibility of being able to insure your earnings between 50 and 65 percent of your gross earnings which will include both your salary and the amount of dividends paid. Any dividend paid will have to be separate to your salary and you must be actively involved in the success of the business either as the sole employee or part of a team.
Group income protection insurance
Income protection for managers and executives can also be taken out by the company as a group plan that covers a number of the top managers and working executives. The premium for the group plan will be paid by the company concerned and the benefits received would also be paid to the company. The benefit is then paid to the ill person by the company until he or she recovers enough to be able to return to work.
The range of options in both business and personal income protection policies mean it can be a good idea to consult a business or personal financial advisor, or a life insurance specialist, to make sure you're effectively protected and have income protection insurance that suits your needs.