A totally unexpected emergency or accident is all it takes to throw your well-planned financial life into turmoil. It’s scary to think about it: how will you pay your bills if you’re out of work for an extended time due to an injury?
Here’s where income protection insurance can help safeguard your finances if circumstances like these arise. Whether you suffer from income loss due to injury, illness or disability, income protection insurance can help replace your take-home pay while assisting you in managing your finances. This way, you can concentrate on getting better instead of worrying about money.
If you are not sure how to go about choosing the right income protection policy, here’s a short guide to help you make the right choice.
How Income Protection Insurance Works
Generally, income protection insurance pays you money if you are unable to work for a period of time. For those who are unable to take time off work because of ongoing financial responsibilities – for example, caring for dependents or repaying debts, income protection insurance can be a good safety net.
Additionally, income protection insurance can supplement your employer’s sick or extended leave coverage, especially if you cannot work for a longer duration than what is stipulated in your company’s policies. Independent contractors who don’t have a company to cover their sick leaves can also benefit from income protection insurance.
The sum paid to you is calculated based on your pre-tax income for the year before you file your claim. The insurance covers up to 85% of your previous earnings, which is considered a reasonable and reliable amount.
Eligibility Criteria for Income Protection Insurance
Each insurance provider has its own disability threshold that qualifies a person for coverage. The criteria are usually detailed in their product disclosure statement and websites.
This said, the type of policy you are qualified for largely depends on your intake information. When you sign up for a plan, you are asked to provide personal information, such as your medical history, lifestyle variables, age, and any high-risk hobbies. Your insurer will offer a suitable policy based on these details and other risk factors.
Which is the Right Policy for You?
There are various types of income protection insurance policies with different specifications:
- Policy Type:
Insurers used to offer two types of policies: agreed value, which pays out a fixed amount when you sign up, and indemnity value, which pays out a percentage of your salary based on your income at the time of the claim. Since 2020, insurers are no longer allowed to sell agreed value policies, so be aware of any business offering you one as a new customer.
- Waiting Period
As income protection is intended for long-term illnesses and injuries, insurance providers incorporate a waiting period into the policies. After you file a claim, you would have to wait for some time before collecting benefits. Waiting periods range from 14 days to two years – the longer the waiting time, the less expensive the insurance policy. However, you should always have other forms of financial protection as a temporary buffer, such as savings, while you wait for your pay-out.
- Premium Type
There are two methods for estimating premium fluctuations over time offered by insurance companies. Stepped rates adjust every time you renew your policy. The older you are (and the larger the risk for the insurer), the higher your rates will be. The second option – level premiums are more expensive at first, but rates are not calculated depending on age. Stepped premiums are a safer choice if you expect increments in your income as you get older.
- Length of Benefits Period
Income protection policies are ideal when you need an insurance plan to cover you for a few years or until you can claim retirement benefits. However, they are not indefinite. Bear in mind that the longer the policy is in effect, the more it will cost.
When you need something to fall back on financially, income protection insurance can be a lifesaver. First and foremost, equip yourself with the right information about what income protection can offer you. Fortunately, there are many consultants specializing in both personal and business insurance in Melbourne, including other policies like key person income protection. It’s a good idea to find a reputable insurance company and discuss your needs with them before investing in a plan.
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