Income Protection is known by a range of names including Salary Continuance Cover and Sickness and Accident Cover. The ability to generate an income is arguably a person’s biggest asset and Income Protection is an ongoing income policy designed to replace your income in the event of result of illness or injury and you are unable to work.
Income Protection is one of the broadest and most claimed on policies and will replace up to 75% of your income. Income Protection pays that benefit for the length of your disability or the expiry of the benefit period. When compared to lump sum policies, Income Protection can seem more complex; however the variables available allow a person to customise the policy to their specific circumstances.
There are a number of key terms and variables under an Income Protection policy that need to be considered when deciding what is appropriate to insure;
- Waiting Period – The waiting period is the length of time from the date of injury/illness that a person needs to be unable to work before benefits start to accrue (not the start date of the policy). It can be considered similar to an ‘excess’ and there are a number waiting periods available from 14 days right up until 2 years. It is also possible to obtain an additional option that reduces the waiting period for accidents down to 3 days. To illustrate how the waiting period works for a person requiring 68 days off work and they have a 30 day wait
- Benefit Period – the benefit period is the period that a person accrues and receives benefits. The benefit period also defines the extent that a person can claim per injury/illness. The most common options available are a 2 year, 5 year and an until age 65 benefit period. Insurers are also offering a benefit period to age 70 for white collar workers.
It is common for people who are employed on salary and wages to discount the need for Income Protection as it is believed that Sick Pay and Worker’s Compensation will provide adequate coverage. This is a common misconception. Workers Compensation varies significantly between the states and only covers for workplace injuries (or illnesses directly caused by the workplace). An employee suffering for example, a heart attack at work or injuring themselves at home on the weekend is outside of the scope of Workers Compensation and can leave someone without the financial resources to both recover and rehabilitate and to maintain their standard of living.
Income Protection generally does not provide benefits for redundancies or loss of income for reasons other than sickness or injury, however some policies including some limited benefits to assist cover debt repayments.
Those who are self-employed in small business can be said to have the greatest risk. With no sick pay/annual leave and in a lot of circumstances most cash flow being used in the business, interruptions to income due to illness or injury can have dire consequences. Insurer’s treat ‘insurable income’ slightly differently for the self-employed and rather than salary and wages, the insurers look at the level of net (after business expenses) income that person generates before tax. In a lot of circumstances also an insurer will allow an applicant to add back certain expenses like depreciation, donations and motor vehicle expenses to increase the monthly benefit available.
Like Trauma Cover, Income Protection policies vary greatly both in regards to their ‘core’ definitions like how the insurer deems you to unable to work, benefit offsets and waiting period requirements; to their ‘ancillary benefits’ like automatic payments for certain injuries, rehabilitation benefits and extra payments in certain circumstances. Good advice is paramount to ensure that you obtain a policy suited to your requirements.
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About the Author – Benjamin Irons
Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!