A guide to income protection policy

Life is full of uncertainties, and without warning, an incident can occur that changes your life forever.

No one eagerly expects tragic events, but sometimes they happen. When they do, it can leave one disabled, and unable to fend for oneself.

This is where insurance policies come in. Insurance coverage ensures financial reimbursement for any loss that a policyholder suffers. There are various types of insurance, and today, I’ll be talking about income protection policy.

Income protection insurance pays a policyholder who suffers partial or total disability up to 85% of their pre-tax income for a specified duration. This is a good way to cushion the effect of the sudden change in situation.

Each insurance company had its definition of partial or total disability, and the policyholder must satisfy these criteria before making their claims. I advise that you always check their product disclosure statement for their definitions and exclusions.

Why you need income protection insurance

There are several cogent reasons to get income protection insurance. I’ll list a few below.

• If you are self-employed, especially if you run a small business, then you need income protection insurance, because you won’t have paid sick or annual leave.
• As a breadwinner in a family, income protection insurance is just the cushion you need, should things go sideways.
• You should also consider insurance if you have a debt, like a mortgage, for instance, as you’ll have to make payments even if you cannot work.
• If you don’t have partial or total disability, or trauma insurance, income protection insurance is a suitable cover to consider
• If don’t have health insurance that could cover medical expenses, then you should consider income protection insurance.

Types of income protection insurance

There are two types of income protection insurance. Each has its peculiarities.

Indemnity value policy:

Indemnity value policy covers a percentage of your salary. This means if your salary had reduced since you got the insurance policy, your monthly insurance payment will be smaller. 

Indemnity value policies are usually cheaper and are more appealing to people with stable incomes.

Agreed value policy:

Agreed value policy covers a percentage of an amount agreed when you signed up for the policy. They are usually more costly but are more appropriate if your income changes yearly.

Waiting period

Waiting period refers to the time you have to wait after you make your claim before you receive your monthly payments. This period varies for different insurance companies, from 14 days to two years. The cheaper the insurance policy, the longer the waiting period.

You should always consider factors like your savings, sick and annual leave, and the availability of emergency funds before you decide on a waiting period

Benefit period

The benefit period refers to the duration of the monthly payment from the insurance company. It typically lasts between two to five years for most income protection insurance policies; however, some are set to a specific age (like 60). 

A policy with a longer benefit period will be more expensive, but it also means you have greater protection for situations where you cannot work for a longer period.

Types of premium

Stepped premiums:

stepped premiums are recalculated during each policy renewal, and the value usually increases with each renewal. This is because the chance of a claim increases as you get older.

Level premiums:

Level premiums do not increase rapidly with each passing year, because they aren’t dependent on your age. The premium is, however, high at the beginning of the policy.

The type of premium you choose will determine how much you will pay now and, in the future, but it will also determine your level of cover.

Information your insurer will need

When buying income protection insurance, you must provide honest information about yourself. The information you provide will influence their decision to provide you with insurance. You also have to provide this information every time you want to renew or change your policy.

The information you will provide may include:

• Age 
• Job
• Medical history
• Income (commissions, salary, wage)
• Lifestyle (if you are a smoker, for example)
• High-risk hobbies (like rock-climbing, skydiving, etc.)

With this information, an insurer will decide if they should approve you for insurance, the amount you’ll pay as a premium, and your policy’s terms and conditions.

Conclusion

The advantages of income protection insurance are appealing enough that it’s only logical that you consider it. There are many insurance companies with content to enlighten you and also offer you their products. This makes this insurance policy very accessible.

By searching for these insurance companies, you also get options, and can easily compare products, and then choose the most suitable for you.

Other Resources: Retirement Annuity | Professional Liability Insurance | Best Life Insurance Companies for Young Adults | 7 Types of Insurance Covers | Car Insurance | Health Insurance | Why Do You Need Income Protection Policy | Household Insurance Cover | Taxation of Insurance Policies | Choosing the Right Insurance Cover | Insurance Cover in SA