Which type of income protection insurance policy is right for you?

Choosing suitable income protection for your situation.

Sudden illness or unexpected injury can cause an after effect that might prove just as disastrous to you and your family as the actual illness. Just the thought of the tables being turned – from a breadwinner to a dependent – can be a real cause for worry. Moreover, the thought of not being able to provide for your family anymore can further add to that depression. Then, there are the dire predictions of a possible second global financial crisis. The only thing that could lessen and alleviate the fear and anxiety of these uncertainties is to be able to protect yourself from this financial uncertainty.

Protecting your future against such uncertainties can be effectively done by getting income protection insurance. Income Protection Insurance is a type of life insurance policy which pays up to 75% of your gross monthly income if you have become unable to earn a regular income. Claims on benefits are given after your disability is duly proven, and you are unable to perform a job based on your training and education. Income Protection Insurance basically covers different kinds of financial obligations, such as:

  • Mortgage payment
  • Credit Card payment
  • Utility bills payment
  • Daily living expenses
  • Medical and rehabilitation costs
  • Business maintenance cost

Income Protection Insurance can be tailored to meet specific risk profiles based on your occupation, age, medical history, and your budget. Therefore, each cover can vary from person to person. But there is one thing you should always look out for when you begin shopping for the right income protection policy - a good Income protection Insurance Policy is that which offers flexible options based on your budget and needs.

Different Types of Income Protection

Income Protection will provide you an income when you are unable to work for a certain period of time because of disability. Therefore, understanding how each works is very important.

Basically, Income Protection comes in two different types and can be divided, so to speak, into sub-groups. These two types of Income Protection insurance are agreed value and indemnity value.

Indemnity Value Income Protection Insurance

The Indemnity Value Income Protection insurance where the payment of your benefit is based on the salary you declared upon enrolment. Under this type of income protection insurance, the amount of benefit paid to you will be the lesser of 75 percent of your pre-disability income, or the monthly amount insured shown in the policy.

The definition of the pre- disability income can vary from provider to provider. However, it is generally defined as the income earned over the last 12 months, or the best 12 months over a specific period of time.

Under the indemnity value policy, financial checks are required and necessary when you make a claim. This could prove to be a downside on your part – one which could reduce the amount of the payable benefit if you have recently earned less before the start of the policy.

Agreed Value Income Protection Insurance

The Agreed Value Income Protection is the second type of income protection insurance. Under this type of income insurance policy, you have to prove your income upon enrolment. The premiums you will have to pay under this type can also be much higher by 20% than the indemnity value. The advantage, however, is that you are sure how much you will receive regardless of the changes in your income.

Under the agreed value type, you can submit a proof of pre-application income before or after your policy kicks in. A word of caution though, if you cannot provide a proof of pre-application income before or at the time of your claim, the amount of the monthly benefit you will receive can be reduced.

On the whole, an agreed value policy gives the monthly benefit guaranteed upfront. Thus, in contrast to the indemnity value, you don’t need to provide financial evidence when you make a claim. This quick process could help reduce the stress when making a claim.

Additional Options for Income Protection

Aside from the two types of Income Protection you can choose from, there are three structures or options where you can base or structure your policy.

  1. Individual Funded Income Protection Insurance

This is income protection paid out of your own pocket. If you opt for this, you have to strategise how to make payments in line with your budget or cash flow.

  1. Superannuation Funded Income Protection Insurance

This is income protection through your superannuation. Having your income protection through your super fund can be a cost and tax effective strategy. However, you have to consider how this will affect your retirement savings.

  1. Company Funded Income Protection Insurance

As the name suggests, this is income protection set up by organisations for their employees, which means your company pays for it.

Whatever type of income protection policy you would go for is up to the budget that you have in hand. But no matter which policy you opt for, be sure that you understand all the terms and conditions that are included in it.

Compare income protection quotes from these direct brands

Name Product Short Description Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period
Receive up to 30% off in your premiums if you’re in good health and meet BMI qualification tests. T’s and C’s apply.
24 months
14 or 28 days
Take out a policy and get a $100 bonus gift after holding cover for 2 months. T's and C's apply. Offer ends 31 March 2019.
5 years
14, 28, 60 or 90 days
Cover up to 85% of your Income (up to $10,000 per month) if you can’t work due to sickness or injury. Cover for 1,000 job types - full-time, part-time and self-employed.

5 years
14, 28, 60, or 90 days
Cover up to 75% (to a maximum of $10,000) of your monthly income with Guardian Income Protection.
5 years
30 or 90 days
Cover up to 75% (to a maximum of $30,000) of your monthly income with NobleOak Income Protection. Plus, get your first month free. T&C's apply.
2 years or to the age of 65
30 or 90 days
Fast online application - no phone call needed. Cover up to 85% (to a maximum of $42,000) of your monthly income with Aspect Income Protection.
5 years
14, 30, 60 or 90 days

Compare up to 4 providers

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William Eve

Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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