What is Income Protection Insurance?
Income Protection is an insurance policy that will payout to the policy holder in the situation that the insured is not able to work due to an illness or injury. Generally, the amount paid out can be up to 75% of your standard income, this figure may be adjusted if there is also payouts from Workers Compensation, Social Security, Sick Leave and other sources.
Why do I need Income Protection?
Income Protection is a safe guard for your household in the case of something happening. If your income stops, your expenses will not and this may leave you in a situation that you will not want to be in. Income protection will help with general expenses.
How can I pay for my Income Protection policy?
Most Australians with a superannuation fund may be able to utilise their superannuation funds to pay for their Income Protection policy. Otherwise, Insurance can be paid on a monthly or annual payment plan depending on the preferred payment methods defined by your insurance provider.
Agreed VS Indemnity Value
When obtaining your Income protection, there will be two choices of policies that can be chosen from; and ‘Agreed Value Policy’, or an ‘Indemnity Policy’.
When selecting the ‘Agreed Value Policy’, it doesn’t depend on the amount of income you are earning at the time of applying for a claim, as you will receive the monthly benefit that has been agreed upon. To receive this benefit, you will need to provide your proof of income upon applying for this policy. This policy is a suitable choice if you have a fluctuating income – because your payout amount will only depend on the proof of income provided at the time of application, so if your income keeps changing over the course of your premium, it will not effect your payout figure.
But if you are unable to provide proof of income for your last two working years, or if you are just starting up a business and do not have a verified proof of income, the ‘Indemnity Policy’ is more suited to your situation. The ‘Indemnity Policy’ calculates your payout figure by assessing your most recent income before the incident of a disability. For this policy – you will need to provide proof of your income at the time of a claim. This is a great choice if you have a stable income, and also if your current position doesn’t allow an Agreed Value policy. Your payout will be less than your income or the sum that you have insured.
Also the Indemnity Policy is less expensive than the Agreed Value Policy, so when choosing between these policies, it really does depend on your past and current income, so make sure the policy you have selected meets the definition of your income.
Stepped vs. Levelled Premiums
Stepped Premiums gradually increase each year the policy is taken out. Levelled Premiums is where the price is locked in for a period of time.
Levelled Premiums generally have a higher initial cost but over the long term they can save money for the policy holder. Levelled Premiums are generally beneficial for the policy holder if taking the policy out for long term.
At Sheffield Financial Advisors we specialise in helping Australians determine an appropriate level of Income Protection cover for their personal circumstances & needs. As the appropriate cover amount & structure is different for every individual we provide tailored solutions.