What happens if you suddenly find yourself unable to work? Whether you get hurt, fall sick, or have to take care of a loved one, income protection insurance is there to fill in the financial gaps. When you’re dealing with illness or injury, the last thing you want to worry about is making sure your bills are paid. It makes complete sense to prepare for income loss with income protection insurance.
Though this is one of the most valuable types of insurance you can have, many people skip this option altogether. A monthly insurance benefit, this policy can pay up to 75% of your pre-injury or pre-illness income while you recover. Some even have extra benefits if you choose to work part-time or work in a reduced capacity. In this guide, we’ll explore what income protection insurance is and who it’s for.
How Does Income Protection Insurance Work?
To begin, Income protection insurance pays part of your lost income if you find yourself unable to work. You might not be able to work because of a disability due to an illness or injury, and this insurance benefit helps you pay the bills so you can focus on healing.
In most cases, if you’re unable to work for a qualified reason, income protection insurance pays up to 90% of your pre-tax income within the first 6 months and up to 70% for a specified time after that 6 months. This is designed to replace your income so you can heal without worrying about your finances.
However, like all types of insurance, there are some exceptions and product disclosures to pay attention to before agreeing to any specific insurance protection insurance. Each insurer has its own rules and qualifications that need to be met to offer coverage.
Who Needs Income Protection Insurance?
With that in mind, who exactly needs income protection insurance? In most cases, everyone can benefit from income protection insurance. We can’t predict the future. That means illness and injury could be lurking behind any twist of fate. You should consider income protection insurance if:
- You’re self-employed or a business owner
- You have dependents or other family members who rely on your income
- You have consistent debts and payments like a mortgage that you need to make payments on regardless of your employment status
- You’re worried about your financial wellness in the event of an illness or injury
To qualify for income protection insurance, you need to be employed or self-employed. In other words, you need to be earning an income if you wish to qualify. Additionally, you want to calculate your current budget and expenses to determine just how much you would need as part of your income protection insurance benefit to make ends meet.
Also, note that income protection insurance is not a replacement for total or permanent disability or trauma insurance. If you find yourself no longer able to work at all, you might need to pursue Centrelink payments and other benefits to support yourself.
How to Choose an Income Protection Policy
If you’ve created a budget and decided that an income protection policy is right for you, there are some things to consider. First, you’ll want to think about the type of policy. There are two types of income protection policies:
- Indemnity value: The first type of policy applies a percentage of your salary as the benefit. This means if your salary decreased since you bought your policy, you’ll get a smaller insurance payout.
- Agreed value: On the other hand, with an agreed value policy, the amount you receive is agreed upon when you sign up for your policy. While these policies can be more expensive, they are more reliable and can help if your income varies from year to year.
Like all insurance programs, there is usually a waiting period. Which is an agreed-upon amount of time you have to wait before you can receive payments. These can be anywhere from two weeks to two years. Until the end of your waiting period, you will not be able to receive any eligible payments. The longer the waiting period, the cheaper your policy is likely to be. In the meantime, you’ll want to grow your emergency fund and consider what you would do if you suddenly lost your job.
Another thing to consider when choosing an income protection policy is the benefit period. This is how long your monthly payment lasts if you remain unable to work. The typical period for these programs is between two and five years. As you might expect, the longer the period, the more expensive the policy.
Is Income Protection Insurance Right for You?
If you choose to buy income protection insurance, you can do so through an insurance broker, financial advisor, or insurance company. You might also have income protection insurance through your existing super funds. This is often cheaper than buying it directly from an insurer.
Before you agree to any new insurance plan, make sure to check in with your existing budget and financial goals. If you need help managing your current financial status, contact the team at Debt Busters on 1300 368 322 today. Our group of professionals are here to help every step of the way.