How To Choose The Right Income Protection Policy

Helping you set up the right policy for your unique situation

If you’re making money for yourself or to help support your family, then you might need income protection insurance to help you maintain your current lifestyle should you suddenly be unable to work due to sickness or injury.

Income protection policies support your ability to earn an income by proving a monthly benefit should you be unable to work, temporarily or permanently, for a specified period due to an illness or injury. However, before you choose an income protection policy, it’s important that you understand what exactly you’re signing up for to determine whether the policy is right for you.

The right income protection policy should match your:

To find the right policy that will suit your needs, you might want to shop around and compare various income protection options from Australia’s leading life insurance companies.

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What is an income protection policy?

An income protection policy pays you a monthly benefit, generally up to 75% of your pre-claim income, should you become ill or injured and cannot work for a specified period of time. This insurance type provides you with the ability to continue paying your monthly bills and helps ensure you experience no major shortfall in your current lifestyle. Thus enabling you to focus on your recovery, so you can return to work.

To thoroughly understand all of the options, benefits and features available to you, it’s best to consult the relevant Product Disclosure Statement (PDS). However, to help you in your search we explain some of the most important factors you need to consider before deciding which policy is right for you.

Choosing between the different types of income protection policies

When selecting an income protection policy, be mindful of your budget and the amount of cover you take out. There are a number of options to choose from and some additional options you can add to enhance and tailor your policy to suit your specific requirements.

Generally, insurers will give you the choice between an Agreed value and Indemnity value income protection policy.

number-1Indemnity Value income protection

Indemnity value policies are usually cheaper than Agreed value policies, but it does not guarantee the monthly benefit. As stated in the policy, your monthly benefit will be the lesser of 75% of your pre disablement income or your insured monthly benefit. Therefore, if your income reduces after you took out the policy you may receive a lesser monthly benefit.

Your monthly benefit payable is determined during claim time, which is when the insurer will request the financials showing your proof of income.

number-2Agreed Value income protection

Your monthly benefit is determined when you apply for your policy, by the insurer using the financials you’ve provided during this stage.

number-3Guaranteed agreed value

Select insurers will offer this income protection policy type, which converts your agreed value policy to guaranteed agreed value upon you presenting proof of income. To receive such a policy, the insurer will confirm your monthly benefit based on the financial statements you provided during application time.

Which type of income protection policy is best suited for self-employed persons?

If you are eligible, an Agreed value (Guaranteed value) policy is generally better suited to persons with a fluctuating income, like business owners, consultants and freelancers.

An Indemnity value policy is usually better suited to people that have a stable income (or do not qualify for an agreed value policy) and can confidently provide proof of income.

Income protection policy options

There are a variety of options you can add on to your policy to better tailor your income protection for your specific requirements. Please note that this is a general list and does not include every option offered by each life insurance company.

number-1Increasing claims

Allows your monthly benefit to increase while you are on a claim. You can choose to increase your monthly benefit by either the annual Consumer Price Index (CPI) or by a pre-determined percentage as outlined in your PDS. This option is generally more suited to policies with a benefit period longer than 2 years.

number-2Day 1 Accident cover

Start receiving a partial benefit during your waiting period with Day 1 Accident Cover. You’ll receive 1/30th of your monthly benefit each day you are unable to work due to an accident until your waiting period ends and you start to receive your full monthly benefit. Any determination that you are unable to work must be confirmed by a medical practitioner.

However, some policies will require that you are off work for a minimum of 3, 14 or 30 days before you are eligible to get paid your Day 1 Accident Benefit.

number-3Plus vs Standard policies

Insurers will typically offer a Standard and Plus income protection policy, with the Plus option generally offering more benefits at a slightly higher premium, for example:

  • Bed confinement benefit
  • Accommodation benefit
  • Child care benefit
  • Family care benefit
  • Rehabilitation benefit

The above options can be chosen separately or might be part of the Plus policy option. It’s best to review the relevant PDS for more details before considering which option to choose.

number-4Bed confinement

The bed confinement option provides you with an additional payment if, due to a sickness or accident, you are confined to a bed or need to be near a bed for at least 3 consecutive days during your waiting period.

You will generally receive 1/30th of your monthly benefit for each day of bed confinement, until the end of your waiting period.

number-5Needlestick cover

Medical professionals can choose to add Needlestick Cover that protects them from needle stick and splash injuries during the course of their normal working duties. Generally includes coverage for illness caused by HIV, Hepatitis B and C. While this feature can be an additional cost it can come built-in with select insurers.

number-6Total disablement booster payment

You can increase your monthly benefit by 33% with the total disablement booster payment option in the event you suffer a total and permanent disability.
To claim this option you will generally need to be totally and permanently disabled and unable to perform at least two of the activities of daily living:

  • Bathing and or showering
  • Dressing and undressing
  • Eating
  • Using the toilet for hygiene purposes
  • Being able to move in and out of bed or a wheelchair unaided

number-7Business expense insurance

You can protect your business with the Business Expenses Insurance option, designed for self-employed persons that are unable to work due to a sickness or accident. This option provides a monthly benefit to help cover your fixed business costs, such as rent, electricity and other overheads.

number-8Lump sum benefit

Instead of a monthly benefit, you can choose to receive a lump sum. The lump sum benefit option is mainly designed for people who go on a claim due to suffering a total and permanent disability.

Income protection policy ownership options

Another very important decision you should consider before you start comparing policies is how you want to structure your income protection insurance, meaning who will pay for your policy and who owns it.

Usually, income protection insurance can be owned by either yourself, the insured individual, or by your Superfund. In some cases a policy can also be owned by a company, usually when a business takes out keyman insurance.

Self-owned vs Owned by Super

Who you choose to own your policy will impact who has control over it, meaning the policy owner can make changes to the policy, but the owner is also responsible for paying the premiums.

  1. Self-owned income protection: The life insured owns the policy and pays the premiums. When the income protection policy is owned by you, you can claim the tax deductions.
  2. Superannuation owned: Taking out income protection through your super fund allows for your premiums to be paid by your fund, which could help with short-term cash flow problems.

However, the fund will receive the tax deductions, not the insured individual. Gaining access to the monthly benefit can be more complex as you need to meet both the policy eligibility criteria as well as an SIS condition of release.

Select insurers will also offer you the opportunity to split your income protection between self-ownership and fund ownership, this is called Split Income Protection. When structuring your policy in this way, you’ll benefit from both self-owned and super owned options.

Can I have two income protection policies?

Yes, generally you can have two income protection policies. However, they should differ in waiting period and benefit period. Because you can usually only be insured for up to 75% of your income, therefore claiming on multiple income protection policies should not leave you better off financially than if you were able to keep working.

For example, you might have one policy that has a 30 day waiting period, but only a 2-year benefit period, and another policy with a two-year waiting period that pays out a monthly benefit until your age 65.

You need to fully disclose all your existing policies to every subsequent insurer so that the underwriter has all the information needed when assessing your application and whether it’s financially justifiable for you to have multiple income protection policies.

The cost of income protection premiums

The cost of your income protection premiums will be influenced by a number of factors, including your occupation, age, the amount of cover you want, your overall health (including whether or not you smoke), the insurer’s definition of a disability, and your waiting and benefit period. The cost of your premiums will also be affected by your choice of premium structure, stepped, level or hybrid premiums.

1. Stepped premiums

Cheaper in the short term as they start off more affordable but increase every year due to an increase in your age as you become more likely to claim as you get older.

2. Level premiums

More affordable in the long term as premiums are based on your entry age, but they start off more expensive.

3. Hybrid premiums

Also known as Optimum premium, is a mix between stepped and level premiums and are only available from select insurers. Your policy converts from stepped premiums to level type premium when your stepped premiums reach a pre-determined price, which is higher the level premiums would have been.

How to pay for your policy

There are a few ways you can choose to pay for your income protection policy. You can pay via Direct Debit or by using your Credit card; there is no extra fee required when selecting payment with credit card.

You also have the choice of paying either fortnightly, monthly or annually. However, premiums are generally 5-8% lower when you pay your premiums yearly.

How to compare income protection policies

Finding the right policy for you depends on your individual requirements and budget. It’s important that you take the time to compare similar income protection products from leading life insurance companies before making a decision. To get started with your search, you might want to read our step-by-step guide to comparing income protection quotes.

Published: February 6, 2018
  • Superlink Your Income Protection Insurance

    Learn how you can save on your premiums and access enhanced benefits with split income protection insurance, that’s both inside and outside of superannuation.

  • The Benefit of Day 1 Accident Cover on Your Policy

    Receive a partial benefit during your income protection waiting period when adding Day 1 Accident Cover. Discover how to receive additional benefits sooner.

  • Specified Injury Benefit

    The specified injury benefits pays you a benefit if you suffer from a specified injury, even if you still working, with no waiting period applicable!

  • Agreed Value vs. Indemnity Income Protection

    Comparing an Agreed or Indemnity Value income protection is an important consideration. We detail the pros and cons of each, to help you find the best!

  • Policy Types

    Comprehensive comparison of agreed value vs. indemnity value income protection policies plus who they suit and how you prove your income

  • Lump Sum Payment

    Include the lump sum benefit option and be eligible to receive a non tax assessable lump sum benefit, adding greater flexibility to your income protection policy at claim time.

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