Insuring Against Loss of Income: Protection from Unexpected Illness and Injury

Those who have a mortgage to pay off, small business owners, and independent contractors without access to sick leave should pay special attention to safeguarding their income against unforeseen illness and injury.

 

Photo by Ketut Subiyanto

 

Getting Income Protection Insurance to Achieve Financial Security

Insuring against loss of income typically involves purchasing disability income insurance, which can replace lost earnings due to disability or illness. This type of insurance complements health coverage and can provide a monthly income to help meet ongoing expenses like mortgage payments, taxes, or payroll for up to seven years in case of a qualifying event such as disability or death.

You can receive about 70% of your salary for a certain amount of time with income protection insurance to help when you are unable to work.

The most common medical conditions for insurance claims are cancer, heart attacks, depression, and anxiety. Although you can get a policy up until a specific age, such as 65, payments typically last between two and five years. The amount is typically based on 70% of your income from the year before the illness or accident.

Some people may consider income protection insurance to be a part of their superannuation, however, this is often only the case for life insurance and total and permanent disability coverage. But, if you do have income protection insurance in your super, investigate the level of the automatic cover, as it can be low.

As an alternative, you might purchase a coverage outside of super, in which case your premiums are tax deductible. The only insurance that is tax deductible is income protection insurance. Trauma insurance and other non-super life insurance products are not tax deductible.

 

Create a budget.

When considering income protection insurance, there are a number of factors to take into account. The best place to start is by calculating your budget and estimating how much you would need to support your family’s standard of living in the event that you were unable to work. After that, you can choose the right amount of income protection insurance and other elements that influence premiums, like how soon you could require payments to begin and how long they will stay.

Although many people believe income protection insurance is pricey, you may customize policies to fit your budget by adjusting the payment amount as a percentage, the duration of the payment, and the timing of the payment after you are unable to work. Your premiums may go down if these criteria are adjusted.

 

Check the specifics of the policy.

There are a lot of things to consider that could impact the outcome of any claim you make. Thus, be careful to read the declaration on product disclosure.

Know the difference between “own occupation” and “any occupation” for cover, as each insurer has a different definition of what constitutes a payment. For instance, if you are a surgeon and you become incapable of using one of your hands for surgery, your insurance will reimburse you if you have a defined “own” vocation since you are unable to continue practicing surgery. However, if you choose “any” vocation, the insurer might contend that you might still practice medicine but not surgery, in which case the claim might not be honored.

It’s also a good idea to be aware that there can be restrictions on the types of illnesses that are covered if your policy does not request your medical history.

Whether your premiums are level or stepped is another factor to take into account. Stepped premiums typically start out modest and go up as you get older. Although level premiums start out higher, they usually don’t go up until you turn 65. For some, level may end up being less expensive in the long term. To purchase income protection insurance, you typically have to work a minimum of 20 hours per week, and the coverage can only be purchased up until the age of 60. In addition, you must include any reward you get on your tax return.

Give us a call to discuss if you would like to make sure you have enough insurance to safeguard you and your family in the event that you lose your job.

 

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