Part 3 - What is Income Protection Insurance / Salary Continuance?

Income Protection Insurance will provide up to 85% of your income as a monthly benefit after you have served the policies waiting period when you are suffering from a sickness or injury that is preventing you from returning to work.

This benefit can help you meet your financial commitments while you are unable to earn an income.

Each income protection policy has different definitions of a partial or total disability that must be met before you are eligible to make a claim.

What if I lose my job? Am I able to claim for that?

The simple answer is No. Income Protection insurance does not cover you for loss of income because you have lost your job or been stood down. Income protection is solely there to provide you with an income replacement if you can not work due to sickness or injury.

Why is income protection important?

• It provides a safety net and reduces the financial risk you are exposed to if you suffer from a sickness or injury that prevents you from working.
• It provides you with a monthly benefit which helps ensures your financial commitments can still be met. Without the need to unwinding any financial strategy.
• In most cases, the benefit will be indexed in line with inflation. This means that the benefit will increase in line with the cost of daily living.
• Premiums paid for income protection insurance are tax-deductible and reduce the policy owner's income tax liability.

How is the insurable income worked out, and what evidence is required at claim time?

Income protection is sold on an Indemnity basis. With an "indemnity" policy, you are insured for what you say you earn, but you have to verify your income if you make a claim. This can be done by presenting tax returns or profit and loss statements if you are self-employed. If your income has reduced since you applied for cover, your claim will be paid on the reduced amount.

Important Note: If your income has reduced or you have moved to a less risky occupation, you should review your policies as you may be paying higher insurance premiums than required.

So how do can I pay for my TPD Insurance?

You can have your income protection policy through super or in your own name. However, Income protection premiums held outside of superannuation are generally tax-deductible to the individual. Holding your income protection policy outside of superannuation also allows you to obtain a more comprehensive range of benefits.

Like with all personal insurances, you can generally choose to structure for your Income Protection insurance premiums with either:

• Stepped premiums: recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
• Level premiums:  charge a higher premium at the start of the policy, but changes to cost aren't based on your age, so increases happen more slowly over time

Your choice of stepped or level premiums will impact how much your premiums will cost now and in the future.

What other factors are there when deciding on an income protection policy?

Waiting Periods

​Waiting periods range from 14 days to 2 years, and Income Protection benefits are paid monthly in arrears.

To determine what waiting period is right, you first need to know how long you can go without an income. If it is the shortest waiting period, you will need to be prepared to be paying a higher premium because the shorter the waiting period, the higher the cost of the policy.

Remember to consider how many sick days you have, and any annual leave / long service leave that you could also utilise.

Benefit Periods

As with waiting periods, a range of benefits can come with an income protection policy. These range from 2 years to Age 65, with the shorter benefit period being the cheaper policies.

Ensure you consider that an income protection policy is there to provide you with an income when you cannot due to a sickness or injury and that if, say, you had a two year benefit period and you could still not return to work after that benefit period, the payments stop and you're on your own.

Ancillary Benefits

Some retail insurances can currently offer ancillary benefits that can provide you with a lump sum payment for such things as a specified injury benefit. With the insurance reforms coming in October, these benefits will be lost, so if you are considering getting income protection, it is recommended you do it now.
 
What do I do now? I hear you ask.

• You could do some calculations about what cover you need, source a company with a policy that matches your needs and budget, work out how you want to pay for the insurance, and then go ahead and apply to the company directly. Or;
• You could book an appointment with me to review all your existing insurances and receive a professional recommendation to ensure you have the right level of cover.

OR

• You could click the hyperlink to get a FREE copy of my "The 12 Biggest Mistakes People Make With Their Personal Insurances. And How To Avoid Them" eBook. This book will give you a great understanding of the most common mistakes people make when getting their insurances sorted and how best to avoid them, so you don't repeat their mistakes. There is an old saying, "You should always learn from your mistakes," but isn't it better when you get to learn from other people's mistakes!

And don't forget to follow me on my socials for regular updates in the industry as well as tips and tricks to help you manage your finances better.