As with all personal risk insurance products, there is a need to understand what risk is being outsourced to insurers: Income Protection Insurance explained is, hopefully, Income Protection Insurance (IP) understood.

disabled man in wheelchair smiling that he has adequate income protection insurance

Income Protection Insurance explained

Income Protection Insurance is one of only a couple of personal risk insurance policies that are paid on an ‘income’ basis, rather than on a capital (or lump sum) basis. A simple explanation is that in the event of an illness, accident or injury that prevents the insured person from undertaking a defined set of ‘usual functions’, the insurer will pay the prescribed benefit for the agreed benefit term. Oh, that it was so simple!

Who is IP Insurance for?
All individuals generating an income from their personal exertion, need to contemplate protecting their dependence on the income stream so generated, and acting by taking out Income Protection insurance. Initiating cover – and then revising it on a reasonably regular basis are also important.

How does IP Insurance work?
A valid and eligible claim under an Income Protection policy is usually paid on a monthly basis. It commences after an agreed ‘waiting period’ and continues for the term of the debilitation – or for the term covered by the policy. Note: most insurers pay ‘in arrears’ – that is, 30 days after the qualifying claim period has elapsed the insurer will credit your account with the contracted benefit amount. Accordingly, if your policy has a 30-day waiting period, you may be without income for 60 days.

Your efforts with generating your income may be seriously affected by accident or illness events that leave you debilitated and unable to ‘work’ (or attend to those functions) for extended periods of time. Benefits under this form of insurance are amongst the most consistently paid by insurers – and provide a level of financial support during such periods.

Who should take IP Insurance – and when?
Individuals, whether single and unattached, committed to a partner, or has ambitions of building wealth/ assets and/ or is incurring debt – should protect their future with such cover from the earliest opportunity.

As with any insurance, the earlier in an individual’s life it is contracted, the more likely that the premium will be at standard rates – and that there will be no exclusions. As soon as you start to derive an income from any source, it is wise to insure that earning capacity so as to support the lifestyle that comes with that status.

What type of IP Insurance benefit cover?
In this field there are basically two types of policy on offer: they are referred to as either Indemnity policies; or Guaranteed policies. An Indemnity policy will ‘indemnify’ the insured for protection, usually not exceeding 75% of their verifiable recent earnings rate.

A Guaranteed policy will provide a specified of cover (subject to relativity of the level of cover to verified income at time taken out). Guaranteed policies may also be taken on a ‘level’ premium basis, as opposed to the more usual ‘stepped’ premium basis.

Which insurer’s policy?
When considering any insurance protection it is important to establish the current and foreseeable circumstances of the insured; and to understand the strengths and qualities of the policies offered by the various providers. As a consequence of a detailed establishment of relevant facts, your adviser can determine the most appropriate policy type, level of cover and protection provider for your circumstances.

At Continuum Financial Planners Pty Ltd we are able to advise on all of the major insurers available on the Australian market.

How much does IP Insurance cost?
The cost of this cover is determined by reference to a number of issues: age of the insured; health status; income level; type of policy; premium basis; waiting period; term of cover; and occupation.

It is important to establish the appropriate type and amount of cover so as to optimise the value of the policy relevant to your needs and expectations.

How can IP Insurance premium costs be varied?
As mentioned above, premiums can be determined on a ‘level’ or stepped’ basis: they can also be paid on an annual or more frequent proportional basis (and these frequencies vary according to the insurer’s policy at the relevant time). Annual premiums are usually discounted by comparison with the total of the lesser amounts paid on a monthly or other basis.

How do I use this information?
After reading this information and considering your need to protect your lifestyle financially; and your wealth creation aspirations, Contact Us for an appointment to meet with one of our experienced advisers. Our office can also be contacted by phone, on 07-34213456.

(This post, originally published in June 2009, has been occasionally updated/ refreshed, most recently in January 2020.)