What is income protection insurance?

Protecting your most important asset — you!

Key Points

  •  When you are working your future earning potential is your biggest asset
  •  It is important to protect this is case something goes wrong and you cannot work
  •  When you start a new job or get a large promotion it is a good time to reconsider your cover

It is easy to think about protecting physical things that we can see and touch and forget about the most important thing which is ourselves! The income that you will make during your working life is potentially your most valuable asset and while you are working
it makes sense to protect it.

If you are fortunate to have enough savings that you are only working for enjoyment, or are certain family would step in to help you (and they have the means to) if you were unexpectedly unable to work then you can probably skip this, for the rest of us Income
Protection insurance is a logical consideration.

As explained in, income protection will pay you a proportion of your salary (usually up to 70% of your salary) during periods where you are unable to work due to illness or injury. Payments can continue until you reach retirement age.

Income protection insurance can ensure that you are able to continue to pay your bills and contribute to medical expenses if you are suddenly unable to work. It would remove one of the major stresses and allow you to focus on getting healthy again.

Another positive of income protection insurance is that the insurance premium is tax deductible which lowers the cost of the insurance.

Some things to consider when thinking about income protection:

Your Health

When applying for income protection you will need to provide information about your health and may also need to undergo a medical examination. This is because the insurance company will want to assess the likelihood that you may become ill and cannot work.

If you are in good health and in particular do not smoke you will find that cover is easier to obtain and premiums are lower. You family history is also taken into consideration when premiums are assessed. Doing what is in control to improve your health will help you both physically and financially.

Insurance is designed to protect against unexpected occurrences, therefore income protection is likely to exclude any known aliments. For example if you have had a heart attack previously, the insurance policy may not pay out a claim in the future if you are unable to work due to a heart attack (or your premium would be very expensive to include it). If you take up income protection while you are healthy and young you can avoid these exclusions in the future.

Your Job

Office jobs are generally cheaper to insure than jobs that require physical labour or are in the medical profession (needle stick injuries) as there is a lower risk of being injured while on the job. You probably won’t be changing careers to get cheaper insurance but it is something to know.

Another aspect to understand about any income protection insurance is how they define not being able to work in a job. The most basic cover would pay out if you were unable to work in any occupation, however more specialised insurance could define it as not being able to work in a specific occupation. This is a very important distinction that is particularly important if you work in specialised field. Narrowing the definition of your job will increase the premium but you should consider if you would be happy changing your field of work if you were unwell/injured.

How much cover

You will be able to apply for income protection cover that would pay out up to 70% of your current salary during periods where you cannot work. This the amount could be fixed in the policy or could increase with inflation. As cover is based on your existing salary/job, you should consider applying for income protection when you are working regular hours and when you get a new job or pay increase.

Once you have obtained cover, the terms of the policy may continue even if there are changes to your employment situation so long as you continue to renew your policy each year. It is important to check with the insurance company about this and take advantage of it if you are planning some short term breaks from work. For example if you already had insurance and went to part time work for a few years to study and then became unwell, the insurance would pay out as if you were still working full time.

Another factor is the waiting period before a payments are made. This can range between no waiting period and 3 months. The longer the waiting period the lower the premium as it reduces the likelihood of a claim.

The amount of cover and waiting period that you are comfortable with will depend on you situation (money position). If you have saved an emergency fund and/or have accumulated sick leave and annual leave you may consider lower cover and longer waiting periods

Where to take out the cover

Income insurance can sometimes be offered by superannuation funds and the premiums paid for by the money in your superannuation account. This is beneficial as it may free up money for you now, however at the expense of your retirement savings.

As income protection insurance is tax deductible, most people find it preferable to take up this insurance outside of superannuation.