Income Protection Insurance - the key to protecting your wealth

Income protection insurance is the major key protection measure of all types of life insurance. It protects our ability to earn an income so that we can have a life and a lifestyle.

Neglecting such insurance protection can destroy a perfect wealth creation plan and many hours of personal financial planning simply because investments now have to be sold to pay for the recovery of the uninsured person's health. This could set you back years on your journey to financial freedom and it's best not to get caught out and make sure your income is protected.

Income protection insurance is paid because the person who is insured loses the income earning ability due to sickness or accident leading to a partial or full disability.

Sickness or accident are also referred to as illness or injury depending on the exact wording in insurance documents.

Unfortunately, there are several terms used for income protection insurance and sometimes it is a bit confusing when trying to figure out what it is. Here are a few synonyms for income protection insurance:

• income replacement insurance
• salary continuance insurance (often when used within superannuation)
• disability income insurance
• income cover

In principle, income protection insurance will pay benefits up to a maximum of 75% of your income subject to conditions of the insurance company. This is also available if you are self-employed and can further be combined with small business insurance or key person insurance.

Important definitions for income protection insurance

Generally, an insurance policy is a contract between the insurer and you, the person being insured. The policy (contract) and the accompanying product disclosure statement (PDS) define the terms and conditions under which you are insured.

For income protection insurance, it is therefore very important to know the exact definition of disability used in your insurance contract. This is the key term based on which insurers assess your eligibility for a claim. Just because you suffer a sickness or an accident does not mean that you will get paid a benefit.

There are three major definitions used:

1. Duties based definition - You must be unable to perform either one important duty or the important duties in your occupation due to sickness or accident. Duties are, for example, manual work, supervision, desk work and meetings, client visits and presentations etc.
2. Income based definition - You must have suffered a drop in income as a result of sickness or accident.
3. Hours based definition - You must be unable to perform your duties for a set number of hours per week, e.g. 10 hours, as a result of sickness or accident.

Here are two examples. Bob is a mechanic and his job involves 90% manual work and 10% staff training. Ron is a business manager with 30% desk work, 60% supervision and 10% administration duties. They both have a duties based definition and suffer an accident to their left arm with a difficult condition that is dragging on for months so that they're unable to use their arm. Would their income protection insurance pay for their claim?

• Bob's one important duty is manual work in the workshop. Without the help of his left arm he is unable to perform his important duty and it is likely that his claim will be paid.
• Ron's main important duty is the supervision of staff. Although he can't use his left arm he still can perform that task. His second important duty might be impacted somewhat but as he is right-handed he still can carry out most of his desk and admin work. It is unlikely that his claim will be paid.

A definition based on hours might have been more beneficial but it's usually more expensive too. Which definition is appropriate for you depends on your needs, goals and current circumstances. Some income protection policies can even have duties definitions that change and are re-tested after being on claim for a while. Financial planners have the tools to compare most income protection insurance products in Australia and can advise you which would be the most preferable definition for your circumstances.

Features and benefits

Apart from the most important disability definitions, there are several standard features that income protection insurance provides. Insurance premiums will vary depending on the full package of standard and optional benefits. Other factors that the insurance company will usually take into account are your age, gender, occupation, medical and family history, pursuits and pastimes as well as financial factors.

Below, we've listed some common standard features and options including a short description:

• Waiting period - This is the number of days you have to be unable to work before income benefits start to be paid. Selection options are, e.g. 7, 14, 30, 60, 90, 180 days or 1 or 2 years. Shorter periods attract higher insurance premiums.
• Benefit period - The period of time for how long you will receive benefits paid, e.g. 2, 5 years or to age 60, 65, 70, 75, lifetime. Longer periods attract higher insurance premiums.
• Agreed value benefit - You and the insurer agree at the start of cover how much your income benefit is. In other words, you'll have to prove your income upfront and at claim time it won't be changed even if your income has reduced.
• Indemnity value benefit - Your income is assessed at claim time and is capped at 75% of your income immediately before a claim. This features is generally selected to reduce premiums although you're risking getting less benefits than with agreed value cover.
• Partial disability benefit - Generally, you will be paid a benefit although you are not fully disabled subject to certain conditions. However, the majority of insurers require you to be totally disabled for at least the minimum waiting period.
• Recurring disability benefit - Your claim may be regarded as one continuous period of disability if you suffer a recurrence of the same or a related disability. A new waiting period is basically waived and claim payments are recommenced.
• Indexed claim payments/income - Most income protection policies offer the option of having your claim payments and your income indexed in line with inflation to make sure you're not underinsured.
• Future insurability benefit - An option to increase your insurance cover a set dates or events (e.g. marriage) by, e.g. 20% of existing cover, without reassessing your personal circumstances.
• Death benefit - If you die most insurers will pay a multiple of your monthly insured income to your dependants.
• Upgrade benefit - If insurance products are improved as part of their standard package you will automatically get these improved benefits too without having to reapply.
• Needlestick option - This options is generally restricted to health care professionals and will pay you a sum insured if you become infected with HIV and certain types of Hepatitis while at work.
• Superannuation option - If you're off work due to a disability super contributions by your employer will stop. This option makes sure that they will continue while you're disabled.

This list is by no means complete and insurers have plenty of additional benefits, features and options to add such as rehabilitation benefits, confined to bed benefit, elective surgery benefit, accommodation and travel benefit, relocation benefit, crisis benefit, unemployment benefit, spouse cover and more.

Which benefits and options?

Sometimes it can be fairly confusing trying to compare income protection insurance products because of the long list of benefits and options and each insurer calls them differently too. Options in income protection insurance policies can extend to other types of life insurance such a death (see above), trauma or total and permanent disability benefits. These options are add-ons with reduced benefits. They are usually more comprehensive if taken separately as standalone policies.

You can also take out income protection insurance through your super fund. Many employees, in fact, may have cover as part of a group arrangement by their employers. Some employers might even pay for your insurance premiums. If this is the case your insurance cover was most likely set up based on pre-set variables. For example, income protection insurance was set up for all employees at 60% of their salaries regardless of your own needs.

If you don't know what your insurance situation is I strongly recommend that you find out. Chances are that you have insurance already in super but most likely it was not tailored to your personal needs. It might even make more sense to have income protection as a standalone policy in your personal name because benefits are more comprehensive, e.g. cover up to 75% of income or more, longer benefit periods, easier access and personal tax deductions for the premiums.

Note that income protection insurance is not usually available as a discounted No medical exam life insurance policy which are generally self-service products with limited features and benefits.

If you're unclear about your insurance protection the help of a professional risk adviser like a financial planner is invaluable. They're able to compare products from many different insurance companies and can find the one that suits your needs best and at the best possible price.

Why have income protection insurance if there is Work Cover?

You may think that Work Cover insurance is good enough if you haven't looked at income protection insurance before. However, nothing could be further from the truth. Here are some of the key differences between Work Cover and income protection.

Under Work Cover a person is entitled to receive workers compensation benefits if they have a work-related injury.

All businesses must have Work Cover insurance in Australia because it is compulsory. Therefore, all workers and employees should be covered.

In reality, we regard Work Cover merely as a minimum insurance cover with the potential of uncertain benefits.

• Work Cover is only claimable for accidents or injuries at work.
• It can make a lump sum or regular payments but can also withhold payments until they determine how disabled you are.
• Work Cover might not help you when you need benefits paid the most, i.e. at the start of a claim to pay for medical bills, mortgage repayments or loss of income etc.

There are too many stories of claimants going to court over Work Cover claim disputes and many people who are trying to claim won't see benefits for a long time even if successful.

In contrast, proper income protection insurance gives you:

• benefit payments as soon as you have covered your waiting period;
• benefits not only for accidents but also for sickness events which is the big majority of claims (~80%); and
• very comprehensive benefits package with standard and optional benefits.

Insurers may offset Work Cover benefits if these are really paid. Overall, however, Work Cover insurance is not a match for income protection insurance when it comes to certainty of benefit payments and the comprehensiveness of benefits.

More information:

Types of Life Insurance
Mortgage Protection Insurance
No medical exam Life Insurance
Small Business Insurance
Life Insurance Quotes

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www.Discover-Financial-Freedom.com
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phone 02 8861 1688

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