Income protection insurance provides a monthly benefit for a specified period in the event that you are unable to work due to a sickness or accident.
Monthly benefits are paid whilst you are totally or partially disabled, or under rehabilitation. The premium for income protection insurance varies depending on a number of factors that include:
- The percentage of gross salary or earnings covered (up to a maximum of 75%)
- The waiting period before benefits are paid to you (from 14 days to 2 years)
- The length of time the benefit is to be paid (from 2 years to age 70).
- Your sex, age and occupation, and
- Whether you smoke or not.
Income Protection can be a bit of a ‘minefield’, particularly at claim time, if you have not done your homework. So here is a very brief overview:
The type of contract you purchase will depend on the above criteria and also on whether you purchase it from a Life Insurance company or a General Insurance company. You will hear terms used like cancellable, non-cancellable, indemnity, agreed value and accident only, but what do they all mean?
Cancellable – Normally offered by General Insurance companies, this means that the insurer does not have to renew your policy. This regularly happens after they have paid a claim and often to the disgust of the client who probably did not take the time to read the 60-page product disclosure statement. Try to avoid this style of contract if at all possible.
Non-Cancellable – Offered by Life Insurance companies, this means that only you can cancel your policy, not the insurer, regardless of how many claims you make. Unlike home or motor vehicle insurance, the insurer cannot increase your premiums because you have made a claim either. They will normally only increase premiums as you get older or as your benefit increases.
Indemnity – This means that when you make a claim you will need to provide evidence of your income for the previous 12 months so the insurers can calculate the benefit payable to you. This may not be such an issue if your income is fairly constant and you keep accurate records, however, if you are insured for say $10,000 per month and your income has gone down in the last year due to unforeseen financial circumstances, and you cannot justify that level of cover, then the insurer will reduce how much they pay you. Also try and avoid this style of contract if possible.
Agreed-Value – The insurer agrees to pay you an agreed amount based on the financial evidence you provide at the time of your application. Even if your income reduces due to unforeseen circumstances, you are guaranteed of receiving the insured benefit when you make a claim. A Non-Cancellable, Agreed Value contract is your best option if you can obtain it.
Accident Only – Exactly what it says – you will not be paid a cent if you get sick. This style of contract always leads to trouble at claim time particularly if the insured person was involved, for example, in a car accident that was caused by their asthma attack. Yes they were in an ‘accident’, but the accident was caused by a pre-existing illness therefore they are not covered. Try and avoid these contracts as well.
Another word of caution – some Income Protection contracts have clauses that allow the insurer to reduce how much they have to pay you. A typical clause is the “Offset” clause which allows them to reduce your monthly benefit if you receive other disability benefits (not such a bad thing), or other legislated benefits such as worker’s compensation or 3rd party accident payments (this can become complicated), and even if you haven’t yet received those benefits but are entitled to receive them (you are now talking major anxiety attack!!!).
Most professionals should be able to obtain contracts with no offsets other than other income protection contracts where the total benefits received from all insurers would exceed 75% of your income. This is fair enough because there would not be much incentive to return back to work if you could sit on your backside watching Oprah all day and get paid more than what you were earning while you were actually working.
Most office workers and blue collar workers will have offset provisions but make sure that your insurer can only do this if you actually receive the money from the other insurance company. Your total benefit received from all insurers should still be up to 75% of your income if that is what you have paid for (note: this is reduced somewhat for higher income earners).
If you need further information or assistance simply contact our office.