You are likely to have some common financial obligations, regardless of your age, job, or health condition. Moreover, you have goals and plans for the future that will depend on your income and savings.

If you are unable to work and have no income, will you be able to pay your bills? In such a dire situation, income protection insurance will be a lifesaver until you return to work or you retire. In this article, let’s find out what the right income protection insurance policy should include.

Why is Income Protection Insurance essential?

Many Australians find that they don’t have adequate income if they’re unable to work due to uncertainty. They need security and backups to sustain their regular life.

Unlike other insurance types that offer a lump sum amount, income protection insurance is specifically created to allow you to cover the expenses of your daily living necessities. After the waiting period, income protection lets you replace up to 85% of your income if you are unable to work due to illness or injury.

Factors to consider while choosing the right Income Protection Insurance for you:

It’s easy to understand how insurance can balance your life if your source of income is suspended for a while. That said, it is important to choose the right income protection policy for you.

Below are some basic elements you would do well to consider while selecting the right one for you.

Waiting and benefit period:

Depending on the conditions associated with your insurance coverage, you need to wait 14, 30, 60 or 90 days after filing a claim before you start to receive income protection payments.

Your benefit period is the length of time you’ll be paid funds by the insurer. You can select a shorter benefit period (like two years), which leads to lower premium payments. Regardless of your inability to work, your benefits will terminate at the end of the two years.

The cost of the premium may increase if the benefit period is longer. However, you will receive income protection benefit payments for an extended time as long as you’re still unable to work because of sickness or injury.

Knowing the potential exclusions:

Insurance providers can include different exclusions in your policy.

The following are frequently excluded from income protection insurance:

  • Self-imposed harm, including a suicide attempt
  • Participation in any illegal activity
  • Heavy consumption of drugs or alcohol

Some providers can exclude regular pregnancies and circumstances related to mental health issues. Before finalising your coverage, it is always a good idea to thoroughly check through these exclusions with your insurance provider.

Clarity on the expenses that comes under the Insurance:

In certain situations where you don’t need up to 85% of your income coverage, you can use it to lower your premiums.

To begin with, calculate 85% of your pre-tax income. Using this figure, make a list of all your basic expenses like groceries, mortgage, energy bills, personal loan instalments, education fees, etc.

Compare your monthly expenditures with the 85% income figure. If the figure adequately covers your costs, you could select a smaller insured income and save on premiums. You are able to select insurance coverage for less than 85% of your income, based on your requirements.

Number of policies applicable:

In Australia, each insurance provider has a unique underwriting procedure, which means each one has its unique criteria to accept your insurance application. Additionally, the conditions under which they pay out after a claim are probably different.

Thus, refrain from choosing the first insurance policy you come across. You should compare a number of products and decide which is best for you.

Recognising the situations that can be claimed:

Income protection insurance only applies to illness or injury. This situation can prevent you from working either temporarily or permanently. This cannot be claimed if you lose your job or depart by your own choice.

Final words:

Before arriving at a final decision on which to go for, you must consider several elements that will affect the coverage and your financial situation in the worst-case scenario.

The income protection insurance plan that’s right for you mostly comprises how much you can afford, the amount of coverage you need, and the total duration of time you want benefits to be paid.

Mike Wallis

Mike has over 25 years experience, having spent his first seven years working as a Broker at Jardine Lloyd Thomson in Melbourne and in 2002 was transferred to JLT’s Accident and Health Department in London. For four years (2002 – 2005) Mike was a specialist A&H Lloyd’s Broker and during this time developed excellent relationships with the Lloyd’s A&H underwriting fraternity. In 2006 he returned to Australia in a senior broking position with overall responsibility for Placement Strategy, including the implementation of underwriting facilities and the various authorities granted by Lloyd’s. Mike was the underwriter at two specialist Underwriting Agencies prior to founding Aspect Underwriting in 2016.