Thinking of getting income protection? Want to know a bit more about what it involves? Here are some things to consider......
1. Is it for you?
You probably know someone who’s suffered an accident or illness that’s left them unable to work for an extended period of time. You might even have considered how you’d cope financially if the same happened to you. Yes there are Centrelink benefits, but if you found yourself unable to work due to illness or injury, would it sustain the lifestyle you’re used to? If your income’s around the average Centrelink Disability Support Pension of $350 per week, you might be able to manage – but if your wage is closer to the Australian weekly average of $1,322, things would get difficult.
So if you think income protection could be for you, here are some details you need to know about.
2. Understand the implications of waiting periods and benefit periods
The waiting period is the time you must be unable to work, due to illness or injury, before income protection payments kick in. The most common waiting periods are 14 days, one month, two months, three months, six months, one year and two years. Basically, the longer the waiting period, the cheaper the premium – but remember to balance that against the time you’ll need to make ends meet before payments start.
The benefit period is how long you’ll receive payments for, while disabled (based on your insurer’s definition). Common benefit periods include 2 years, 5 years, or to the policy anniversary before you turn 60 or 65. You’re likely to be paid more on policies with a longer benefit period, so expect to pay a higher premium than you would for shorter ones.
3. Understand the disability definitions
These are used by income protection providers to assess your inability to work. The most common are ones based on duties-based, hours-based or income-based definitions. How this affects claim outcomes depends greatly on the individual, so it’s best to ask your financial adviser which is best for you.
FYI: The average cost of life insurance for a 35 year old man is just $29 per month – that’s less than a coffee a day.
4. Know the difference between indemnity and agreed value policies
An indemnity policy: These pay a benefit based on your income earned during the 12 months prior to claim time, up to the amount you’re insured for. As a general rule, their premiums are 15-20 per cent cheaper than agreed value policies.
An agreed value policy: If your income fluctuates, say if you’re self-employed, agreed value policies can provide more security. Agreed value benefits are based on your income when you originally commenced your policy. That means if your income has reduced at the time you need to claim, you could still receive the full monthly benefit under your contract.
5. Understand the implications of exclusions
Pre-existing medical conditions or involvement in a sporting/pastime activity might be excluded from coverage under some income protection contracts. The process of underwriting requires you to disclose personal details of your health, occupation and pastimes, which will be assessed. You’ll be made an offer in writing if an exclusion applies to your policy.
6. Weigh up underwritten and non-underwritten products
Some providers offer ‘easy’ income protection by removing the need to underwrite. While that might sound appealing, the flipside is those policies have pre-existing condition exclusions. In other words, your chance of getting paid a claim may be lower than from underwritten products.
7. Be sure you've given full disclosure
If you opt for an underwritten policy, fully and accurately disclose your occupation, income and health details at application time. If you don’t, you risk forfeiting any future claim.
8. Look for...
Policies that offer ‘value-add’ options to help get you back to work following a disability. Many quality policies now offer in-built counselling and rehabilitation options.
9. Do your research
The popular belief that, ‘insurers never pay’ is a myth - the facts tell a different story. In 2010 Australia’s life insurance industry paid $3.5 billion in claims – an average of $14.3 million paid to 245 people every working day.* Some companies have better claim track records than others, so consider those with the financial strength to honour your policy, and take pride in paying legitimate claims quickly.
10. Get a qualified opinion
And finally, always engage your financial adviser when deciding which income protection policy is best for you. They’re the person best qualified to assess your income protection needs, and ultimately ensure you get the best claims service in your time of need.
Check out these facts and figures on insurance in Australia. For more information on income protection, click here.
*The Risk Store, Industry Statistics 2010, published 30 June 2011