Income Protection – What You Need to KnowJuly 5th, 2012 | Posted by in Articles
What is it?
Income Protection insurance – provides a benefit of generally up to 75% of your taxable earnings if you are unable to work due to illness or injury.
Premiums vary depending on occupation, smoking status and age and are generally tax deductible and benefits received are assessed as income.
An Income Protection benefit is usually paid on a monthly basis after the completion of a waiting period and is generally payable to the policy owner who is usually the insured.
How are the premiums calculated?
Choosing to protect yourself with insurance means you are putting in place the mechanisms to ensure your life is as worry free as possible from a monetary perspective. Your plans to continue working (in essence up to age 60, or for as long as you choose), then leave work to enjoy a financially comfortable retirement, will not be affected by accident or illness that could force you to stop work before planned. This means you can still look forward to continued wealth creation and accumulation, including contributions to your superannuation, even if you can’t work again.
Applying for insurance means you are outsourcing risk to another entity, that is, an insurance company. In order for the underwriters to decide whether to take on your risk (i.e. insure you), they take into consideration five main factors:
1. Your age – The older you are when you apply, the more likely you are to claim; therefore, the higher the premium.
2. Your sex – Women generally live longer, but are more likely to suffer a critical illness.
3. Your occupation – Professionals are regarded as being a lower risk than non-professionals; therefore, the premiums tend to be lower for professionals.
4. Smoker or non-smoker – Smokers will pay a higher premium.
5. Amount of cover – Larger amounts of cover will cost more in premiums.
Stepped premiums means that the premium increases with the insured person’s age; therefore, as you get older and become a higher risk to the insurance company your premiums increase to reflect this.
Level premiums mean that the premiums remain the same. Initially level premiums will be higher than stepped premiums in the early years of the policy but over the long-term it will be cheaper. The big advantage of a level premium is that you know in advance what the premiums will be and don’t find out later you can’t afford the cover when you need it most.
Indemnity Policy does not require financial evidence at the application stage, but it will be needed in the event of a claim. You need to be aware that if your income reduces in the future the policy will only pay 75% of your lower income level. Premiums for Indemnity cover are about 20% lower than Agreed Value premiums.
Agreed Value Policy requires you to provide financial evidence to prove your income at the time of application; the insurance company agrees to insure you for the monthly benefit. This means that in the future, regardless whether your income reduces, you will be paid the agreed monthly benefit, and in the event of a claim, financial evidence will not be required.
Note – an agreed value policy will have premiums approximately 20% higher than indemnity cover. This means that for salary based wage earners, indemnity cover is an attractive lower cost form of cover; however, for people with fluctuating incomes an agreed value policy will provide more certainty at time of claim.This material is not intended to constitute personal advice, and must not be relied on as such. This information has been prepared without taking into account your objectives, financial circumstances or needs. Before making a decision based on this material, you should consider the appropriateness of this material having regard to your own objectives financial circumstances and needs. You should consider obtaining independent advice before making any decision.
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