What is an income protection policy?
Before looking specifically at income protection policies for farmers it makes sense to quickly look at exactly what this type of insurance policy provides the insured. In short, the person named on the policy can claim for a percentage of their income each month should they become unable to work due to illness or injury. There are of course limitations to every policy and criteria do have to be met before a claim can be made but when an illness or injury qualifies then up to 75% of the normal income from employment can be claimed on a policy.
Why Australian farmers need income protection
Farming is more than just a job, it’s a way of life. If you, as a farmer, become sick or injured to the extent that you can’t work your farm then everything grinds to a halt. You might miss your crop planting season, or you might be unable to harvest what you’ve grown and as a result you’ll struggle financially for years to come, literally.
In the short term, an income protection insurance policy can provide a guaranteed income to pay your bills and put food on the table. Long term though it can also pay to hire a farm labourer to complete the tasks you can’t because of your illness or injury. This way your crops get planted and harvested, your cattle get milked or taken to market and you don’t have to worry about your immediate future while you recuperate.
Is income protection available for farmers?
Yes income protection as well as life insurance both available for farmers in Australia however it is vital that you buy the right one. Because the income of a farmer is never steady or guaranteed some income protection polices aren’t suitable and can in fact be detrimental to your finances.
Choosing the right policy
Most insurance companies that offer income protection calculate the amount of ‘income’ they pay you each month according to the average amount you earned per month for the 12 months prior to you making a claim. So for example, if you earned an average of $2000 per month for the year before you make your claim then a policy that pays 75% will provide you with $1500 per month for the period you agreed to in you policy, which is normally between two and five years.
The trouble with the farming industry however is that incomes differ widely from year to year, as you probably know. One year you may have a bumper crop that sells at a high price and so your income is higher than usual. The next year however you might plant the wrong crops or they may fail due to unpredictable weather and as a result your income is actually negative. Obviously if you become ill or injured during the year following a good year then the monthly payments from your income protection policy will be high and your claim will be successful. If however you claim during the year following a negative year when your average income was nothing then your claim won’t be paid.
With this in mind you need to find an insurer who is willing to agree to a standard amount to be paid each month before the policy begins. It is too late trying to negotiate at the time you make a claim because this is the time when your insurer will want to see your financial statements from the previous year so they can calculate how much you should receive as a monthly pay-out. If you have had a negative year then your insurer won’t pay but if you agree an amount beforehand they will.
The downside to finding this type of income protection policy is the premiums you’ll pay. Obviously because your insurer will have to pay an agreed amount on the policy regardless of your previous year’s average income you’ll find the premiums are higher than if you opt for a regular policy i.e. one where the benefit paid is proportional to your average income. Thankfully there are a few ways of reducing your premiums though.
Is income protection for farmers in Australia worth buying?
This type of insurance policy is definitely worth buying and especially if you work your farm as the sole labourer. It may mean paying another premium and adding another insurance product to your portfolio but the potential consequences of not buying it far outweigh the cost of the policy.
Remember that you will need to agree a monthly payment in advance with your insurer and that not every insurer will do this. Hence, you need to shop around to find a policy that suits your farmer lifestyle
