We are all pretty familiar with the concept of sick pay – if we can’t work due to illness our employer will pay our salary for a set number of days.
But what happens if you’re self-employed?
Or you are still sick and have used up all of your sick pay?
Bills don’t stop coming in, mortgages and rent need to be paid and living expenses don’t stop. This is where Income protection comes in – think of it like extended sick leave that you can purchase.
Income Protection Explained
Income Protection (sometimes called salary continuance) is a type of insurance that provides you with a supplementary income, if you are unable to work due to illness or injury. An Income Protection benefit is generally paid monthly, once you have served a waiting period and is payable until you reach the end of the benefit period or you return to work.
Income Protection insurance can sometimes be confused with other types of insurance, such as Bills or Expenses Insurance, whereby an insurer will cover expenses as a reimbursement. With Income Protection, an insurer pays the Monthly benefit as a cash amount to your nominated bank account and you can choose how to spend that money.
The other great thing about Income Protection insurance is that, depending on your policy, you may be able to claim a partial payment. This means if you are making a gradual return to work, after commencing a claim, your insurer may make a partial payment to top up your income while you return to full time work.
How do Insurers Calculate my Premium for Income Protection?
There are a number of factors an insurer uses to calculate your premium. These include:
- Age & Gender
- Smoking Status
- Employment Status
Generally, income protection gets more expensive as you get older, but there are ways to lock in your cheaper premium, if you commence a policy when you are younger. Smokers will generally pay a higher premium than non-smokers. Certain occupations attract policy limitations. For example, an abalone diver will probably pay a higher premium or receive a limited policy, when compared to an account.
Finally, your income is used as a basis for calculating your monthly benefit, and we look at this in greater detail.
How much cover can I get?
Insurers are usually happy to cover up to 75%-85% of your salary or salary package. This means if you earn $100,000, you could potentially cover between $75,000 to $85,000 p.a. or $6,250 to $7,083 per month. This monthly amount is often referred to as the Monthly Benefit.
How long do I receive the monthly Benefit for?
As long as you meet policy guidelines and you are eligible for a monthly benefit, you can receive payments for the entire benefit period. The benefit period is something you choose at the beginning of your policy. This can range from 2 years up to the day you turn 65. Some professions can obtain cover up to age 70.
How long do I have to wait until I receive a benefit?
This period is known as a waiting period. It can be as short as 14 days or as along as 2 years. The waiting period works like an excess, in that you would have to be off work due to illness or injury for the waiting period stipulated on your policy. As you increase your waiting period, you reduce your premium.
What is the difference between Agreed Value or Indemnity Income Protection?
When you apply for income protection you select either an indemnity policy or an agreed value policy. An indemnity policy is based on the lower of your recent earnings (generally based on previous 12 months to 36 months) and the monthly benefit on your policy statement.
So, if you had a monthly benefit of $6,250 (because you used to earn $100,000 p.a.), but for the past 3 years you have only earned $75,000 p.a, then the monthly benefit you actually receive may only be $4,687 pm ($75,000 x 75% of Salary / 12 months).
As you can see, this could be a substantial difference in what you hoped to get. This variation is common in self-employed people and those who work in cyclical industries.
Alternatively, you can purchase an Agreed Value policy. This generally means that if you take out a policy with a monthly benefit of $6,250, and you can justify this amount based on salary at time of application, you will receive this monthly benefit, irrespective of your previous historical earnings at time of claim.
Can I have Income Protection in my Super fund?
Some super funds offer income protection polices through the fund. This can be beneficial as premiums can be paid for from your superannuation account.
However, there are certain laws regarding income protection in super, that limit the type of income protection policy you can hold in super. For example, income protection policies in super are generally Indemnity policies.
Is income protection tax deductible?
While you should confirm this with your accountant, Income Protection policies that you pay for personally can potentially be claimed as a tax deduction.
Want Personalised Advice on Income Protection? Would you like to get a quote? Contact us on (07) 5437 9243 or at firstname.lastname@example.org for an obligation free discussion on suitable Income Protection options for you.