‘Income Protection insurance simplified’ is an article written to make this life insurance product easier to understand – and we trust, will lead skeptical readers to reconsider their approach to their need to include it as part of a wealth protection (and wealth management) strategy.
Income Protection insurance is an important wealth management strategy – and with several weeks’ application processing time being fairly normal, the sooner your application is started the sooner your most valuable resource: your earning ability, will be protected. (Processing times vary because of some of the medical issues that arise when doctors submit their reports, where required).
Income Protection insurance simplified through answering some questions –
Do I need Income Protection Insurance?
All individuals generating an income from their personal exertion, or from personal management of investment portfolios, are likely to benefit from the reassurance that Income Protection insurance will be there to maintain a reasonable cashflow during times of disability.
If you are an income producer and have any debt (tax deductible or otherwise), this type of cover ensures that your family (and/ or your business) will enjoy financial certainty during your period of disability.
(Note: revising your cover details on a reasonably regular basis is also important – and is a service offered to clients of ContinuumFP.)
How does Income Protection Insurance benefit the insured?
Benefits under this form of insurance are amongst the most consistently paid by insurers – and provide a valuable level of financial support during periods of illness or other incapacity.
An 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 inability to undertake the duties giving rise to your income – and then continues up to the maximum term covered by the policy as nominated by you.
Your reliance on the ongoing income you generate may be seriously affected by accident or illness events that leave you debilitated and unable to perform your usual duties for extended periods of time. Income Protection Insurance will provide financial security during your recovery period – and in some cases the insurer will fund rehabilitation costs to help you return to your income producing activities more quickly.
I’ve just started a new business: when should I apply for Income Protection Insurance?
As with any insurance, the earlier you apply for this type of insurance the more likely that the premium will be at the lowest cost (standard rates) – and that there will be no ‘exclusions’. This is because of the more likely state of your health at younger ages.
As soon as you start deriving an income from any source (or start incurring debt after having become an income producer), it is wise to insure your earning capacity so as to support the lifestyle that comes with that status (and the debt-repayment obligations).
There will in some instances, be a period from commencement of your business before an insurer will consider an application from you, whilst you establish a level of income against which they can assess the protection you will be eligible to insure.
Whether you are single and unattached, committed to a partner, or have ambitions of building wealth/ assets and/ or incurring debt – you should seek the financial protection that comes with Income Protection Insurance cover from the earliest opportunity.
How do I decide which insurer I should apply to?
Continuum Financial Planners Pty Ltd advisers are able to advise you on policies issued by all of the major insurers on the Australian market.
Our team members understand the strengths and qualities of the policies offered by the various providers. We will develop an understanding of your current and foreseeable financial circumstances and will recommend the most appropriate policy type, level of cover and protection provider for those circumstances.
Will I have to pay much for Income Protection Insurance?
The cost of this cover is determined by reference to a number of issues: your age; health status; income level; occupation; type of policy; premium basis; waiting period; and term of cover requested at the time of the application being made are amongst the primary determinants of the premium cost.
It is important to establish the appropriate type and level of cover so as to optimise the value of the policy relevant to your needs and expectations.
Which type of Income Protection Insurance cover is right for me?
There are basically two types of Income Protection Insurance policies on offer: they are
- 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 amount of cover (substantiated by income verified at time of application for cover). Guaranteed policies may also be taken on a ‘level’ premium basis, as opposed to the more usual ‘stepped’ premium basis. (Note that under legislation taking effect during the 2020/21 financial year, this type of policy will no longer be able to be offered by insurers; and guaranteed renewability will also be changed. Our advisers will guide you through the current situation as the legislation takes effect.)
Does it become more expensive each year: and can I pay the premiums monthly?
As mentioned above, insurance premiums can be determined on a ‘level’ or stepped’ basis: level premiums are calculated at the time the policy is taken out and only change in particular circumstances; stepped premiums increase each year based on your age at the anniversary of the policy. Level premiums are more expensive initially but over time, the cumulative cost of protection will usually be less.
Insurance premiums can also be paid on a frequency that suits your needs: monthly and quarterly premium payments are not uncommon. 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.
Do I need to use a Financial Planner to apply for Income Protection Insurance?
By working with a financial planner who is experienced with Income Protection Insurance policy terms and conditions you will be able to have confidence that you have the right amount of cover, under the right policy conditions and suited to your needs in the event of a claim being made.
Our advisers bring their experience and the Continuum Financial Planners client-centric philosophy to your assistance – and through them you will find understanding Income Protection insurance simplified as to how it best meets your needs. They listen to you; they develop an understanding of your circumstances from both lifestyle and wealth creation considerations; and they find the solution that is in your best interest.
ContinuumFP website Contact facility for prompt attention
(Based on an article we originally posted in April 2012, this article was updated in August 2013 and has been refreshed and updated occasionally since then, most recently in July 2021.)