As with all personal risk insurance products, there is a need to understand what risk is being outsourced to insurers. Income Protection Insurance explained below should enhance understanding of this product.
Basic about Income Protection Insurance
Income Protection Insurance is one of only a couple of personal risk policies that are paid on an ‘income’ basis. (It is after all, an income replacement product.) Many personal risk insurance products settle on a capital (or lump sum) basis. A simple explanation is that in the event of an illness, accident or injury –
- that prevents the insured person from undertaking a defined set of ‘usual functions’,
- the insurer will pay the prescribed benefit for the agreed benefit term.
Oh, that it was so simple!
Who is IP Insurance for?
All individuals generating an income from their personal exertion, need to
- contemplate protecting their dependence on the income stream so generated, and
- acting, by taking out Income Protection insurance. Initiating cover – and then,
revising it on a reasonably regular basis are also important.
How does IP Insurance work?
A valid and eligible claim under an Income Protection policy is usually paid on a monthly basis. It commences after an agreed ‘waiting period’ and usually continues for the term of the debilitation. If the term of the policy expires during the claim period there may be difficulty in renewal of the policy.
Note: most insurers pay ‘in arrears’ – that is, 30 days after the qualifying claim period has elapsed the insurer will credit your account with the contracted benefit amount. Accordingly, if your policy has a 30-day waiting period, you may be without income for 60 days.
Generating your income may be impacted by accident or illness leaving you unable to ‘work’ for extended periods of time. Benefits under this form of insurance are amongst the most consistently paid by insurers. This provides a level of financial support during periods of insured events.
Who should take Income Protection Insurance – and when?
Individuals, whether –
- single and unattached,
- committed to a partner, or
- has ambitions of building wealth/ assets and/ or
- is incurring debt
– should protect their future with such cover from the earliest opportunity.
With most personal risk insurance, the earlier in your life it is purchased, the lower the premium will be. Because of presumed better health, early commitment may also obviate claims exclusions. As soon as you start to derive an income from any source, it is wise to insure that earning capacity. This will not only support the lifestyle that comes with that status, but ensure continuation of your wealth accumulation strategy.
What type of IP Insurance benefit cover?
Since regulatory changes to this form of insurance in the early 2020s, only Indemnity policies are now available. An Indemnity policy will ‘indemnify’ the insured for protection, usually not exceeding agreed percentages of their verifiable, agreed earnings rate.
There is a distinction in occupation definitions that you will need to consider: you may be offered –
- any occupation, or
- suitable occupation.
Under the ‘any occupation’ definition, broader terms and conditions apply. You should discuss this difference with your financial adviser, to ensure –
- that you understand the implications for you in your circumstances; and
- are comfortable with the occupation definition in your income protection/ salary continuance insurance.
Under the ‘suitable occupation’ definition, certain terms and conditions apply to your eligibility to go on claim. They will also apply to bring the claim to an end. This policy definition will have a premium cost above the alternative. This is so, because the insurer has a broader obligation to pay your claim.
Which insurer’s policy?
When considering any insurance protection it is important to
- establish the current and foreseeable circumstances of the insured; and to
- understand the strengths and qualities of the policies offered by the various providers.
As a consequence of a detailed establishment of relevant facts, your adviser can determine –
- the most appropriate policy type and level of cover, and
- the most suitable protection provider for your circumstances.
At Continuum Financial Planners Pty Ltd we are able to advise on all of the major insurers available on the Australian market.
How much does IP Insurance cost?
The cost of this cover is determined by reference to a number of issues: age of the insured; health status; income level; type of policy; premium basis; waiting period; term of cover; and occupation.
It is important to establish the appropriate type and amount of cover so as to optimise the value of the policy relevant to your needs and expectations.
How can IP Insurance premium costs be varied?
As mentioned above, premiums can be determined on a ‘level’ or stepped’ basis: they can also be paid on an annual or more frequent proportional basis (and these frequencies vary according to the insurer’s policy at the relevant time). Annual premiums are usually discounted by comparison with the total of the lesser amounts paid on a monthly or other basis.
How do I use this information?
Consider this information and your desire to protect your lifestyle financially. Then reflect on your wealth creation/ accumulation aspirations. In the light of these deliberations you will either be satisfied with your insurance protection in force, or you should make an appointment with one of our experienced advisers. To do so –
- phone our office on 07-34213456, or
- at your convenience, use the linked Make A Booking facility.
(This article was first posted by us in May 2009. It has occasionally been updated/ refreshed, most recently in January 2025.)