Looking to protect your income but not sure what your looking for? Find out how Income Protection works in Australia.
Income Protection Insurance (IPI) can help ensure you are able to maintain your current way of life and keep on top of your regular expenses if you are forced to take time off of work due to injury or illness.
IPI covers you for injuries and illnesses that occur inside of the workplace. A policy will cover you by providing:
- A monthly benefit of up to 75% of your regular income
- Additional benefits available to cover various expenses during your rehabilitation
How Income Protection works in Australia
- How does the waiting period work?
- How do benefit periods work?
- What's the difference between agreed value and indemnity value cover?
- Does IPI cover redundancy in Australia?
- How is the cost of income protection determined in Australia?
- Is it worth speaking with an adviser to receive help taking out income protection?
You will be asked to select an appropriate waiting period when you purchase income protection in Australia. This is the period of time from when are unable to work to when the monthly benefit payments commence.
Common questions around waiting periods
The benefit period as it's referred to in income protection insurance Australia wide is the maximum length of time you would like your benefit to go on for. This period can be from one to five years or to a specific age such as 60 or 65.
Obviously I should choose a longer benefit period...right?
This will come down to how much cover you believe you can fund yourself. The longer you want your benefit to continue, the higher will be the premium cost you will attract. At the same time, you may really need long term protection. You should take the cover out for as long as your finances will permit so that you continue to receive an income in the event of long term incapacity.
IPI in Australia comes with two options for you to choose from. It is one of the first decisions you'll have to make and a very important one. This is you'll have to choose whether to take out the insurance as an indemnity insurance or agreed value. Your choice will depend a lot on your employment situation.
The basic differences in these two options are as follows:
- Agreed Value Income Protection - This is the term used for when you prove your income to the insurance company at the time of application for the cover. The insurance company and yourself will then agree on the amount of benefit you'll receive (usually 75% of the agreed income amount). This will then be the amount you'll receive no matter if your income decreases or increases during latter years. This is also the dearest of the two options, usually around 20% more expensive.
- Indemnity Value Income Protection - This choice is the cheaper of the two options you have as it leaves it up to you to state what your income is at the time of making the claim. But you will have to verify the statement at the time. This means if your income has decreased for any reason (an important factor for farmers and contractors to consider) your benefit will be lower than that anticipated when you took the policy out, as the benefit will be paid on the reduced amount.
Your decision will be based on whether your income is stable, rising, decreasing, or variable. Self employed and business people will probably be better served with an agreed value income protection policy and those in sound employment receiving a regular wage, an indemnity value income protection policy.
Cover for redundancy is currently only offered from general insurance providers in Australia and not if your income protection comes from a life insurance provider.
Anyone looking to find protection for redundancy should take the time to assess if they really stand to gain any benefit from it or if it will just be an expensive extra that may have been better put towards an emergency savings fund.
The cost of income protection comes down to a number of factors including:
- The benefits
- The sum-insured
- Applicant's age
- Applicant's sex
- Applicant's smoking status
- Applicant's medical history
- Applicant's occupation
- Applicant's general health
- Policy design
- Premium structure
- Repayment frequency
- Benefit period
- Waiting period
An adviser can provide great benefit to applicants that are looking to take out income cover but are not quite sure what they are after. An adviser will assess the applicant’s situation and cover needs to help them find an appropriate insurance solution with the policy details and definitions to give them the right protection.
Help finding a tailored policy
Benefits and features can vary greatly between insurers and an adviser will help applicants compare the hundreds of different options available to help them get a policy with the features and benefits that will offer the best protection without blowing their budget. This is achieved by trimming back expensive add-ons that are not really relevant for their situation. An adviser will consider the applicants;
- Job specification
- Level of risk of occupation carries
- Sum-insured needs
- Other benefits that they may be entitled to
- Other insurance cover they might have
- Policy design requirements i.e. premium structure, benefit structure, repayment frequency
- Discounts that they may be entitled to
- Tax treatment
This tailored approach to finding insurance policies can not only mean that the applicant finds an appropriate level of cover but they are not paying too much for it. Insurance advisers are remunerated from the provider that provides the policy so there is no extra payment from the applicant required for the service.
What are the key reasons to consider Income Protection in Australia?
- Premiums are generally tax deductible.
- Sick leave usually only covers you for a couple of weeks but income protection can cover you for long periods up to the age of 65.
- Income protection provides cover for injury and illness both inside and outside the workplace, as opposed to workers compensation which provides limited benefits if you are injured at work.
- Most policies offer additional benefits to cover rehabilitation expenses so you can concentrate on getting back on your feat.
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