Life insurance usually offers four types of cover; life cover, trauma insurance, total and permanent disability (TPD) insurance and income protection. Let's take a look at the differences between life cover and income protection and how to decide which is right for your particular life situation.
What's the difference between the two?
Both can be bought through a life insurer. So what's the difference?
Life cover pays a lump sum to your partner or family members (your nominated beneficiaries) if you die or are diagnosed with a terminal illness.
Income protection pays a monthly benefit of up to 75% of your salary for up to 2 years if you are temporarily unable to work due to illness or injury.
|Event covered||Death by any cause||Death by accident||Terminal illness||Accident or illness that results in:|
|Cover type||Inability to do your job (in the short term)|
|Income protection insurance|
Which product do I need?
Each type of insurance covers a different type of life situation. Life cover provides the promise of long-term financial security for your family in the event that you die, while income protection provides immediate financial assistance if your income stream is interrupted.
Look at your stage in life
Both are vital forms of protection to have, but one may be more important to you than the other, depending on where you are in your life cycle. For example, if you are in the prime of life with a young family and a mortgage and at your highest earning potential, protecting your income could be your first priority.
On the other hand, if you are approaching retirement and have an extended family and a number of assets to your name, ensuring your loved ones are looked after with life cover may be a more important consideration.
Can I combine cover?
Many people who take out life insurance opt for both life cover and income protection and by doing so, protect themselves and their loved ones against both potential life scenarios.
If they fall ill or are injured and are temporarily unable to work, their lifestyle and family needs are protected with a regular income stream until they recover. If they develop a terminal illness and die, their family’s long-term needs will be taken care of with a lump sum payment.
Having both forms of cover is a way of protecting yourself against all eventualities and ensuring your family will not suffer financial hardship either in the short or the long term.
Some traps to watch for with income protection
Not all income protection policies are the same and these are some of the possible pitfalls to be aware of when comparing insurers:
- Make sure the policy is index-linked – this means the premiums and insured amount increase each year in line with the Consumer Price Index so your policy keeps pace with inflation.
- Make sure it has a guaranteed Future Insurability Benefit (FIB) – this allows you to increase your level of cover as needed (usually when you reach a new milestone in life such as a having a child or buying a home) without having to face further underwriting.
- Make sure it is accessible if held in super – if your cover is through your superannuation, make sure the terms are acceptable (ie waiting periods, benefit periods etc) as these can differ to those in a policy held outside of super.
- Make sure it uses the “own occupation” rather than “any occupation” definition – try and find a policy that pays out if you are unable to work at your own occupation, rather than at any occupation (which some insurers can use as an argument not to pay a benefit).
Terms to be clear about with life insurance
Two terms you should know when taking out life cover are “binding nomination” and “preferred beneficiary nomination”. These can determine who receives your lump sum payment when you die, so it is important to get them right.
Binding vs preferred beneficiary nomination
A binding nomination is a legally binding statement that declares who you wish your benefit to go to after you die. A preferred or non-binding nomination means the executor of your will decides who receives your lump sum benefit in the absence of a binding nomination.
The advantage of making a binding nomination is that you can be sure your death benefit will be paid in accordance with your wishes. Having a binding nomination in place will also mean a challenge by a disgruntled beneficiary will be less likely to succeed.
You can typically get a combined policy when you go to the providers website.