Of all the insurances, Income Protection is easily the most important. If your household can’t survive without your income, chances are you need it!
The problem is, it is also the most complicated of the main personal insurances. This can result in you thinking you’re covered until you go to claim, and they don’t pay out!
This article covers off on a few of the most important things to consider when looking at your income protection policy and comparing it to the rest of the market – to help you compare apples and oranges and avoid the spuds. Waiting Period This is the amount of time you must wait while on claim to receive payment. The payment is actually made 30 days after your period ends – for example a 30-day wait will pay you at the 60th day. Most people don’t realise this – so make sure if you have, say, a 90 day wait, you have enough sick leave and savings to get you through 4 months without pay!
Lime Tip: When looking at the waiting period consider how long you can last without income. A 90-day wait is around 30% cheaper than 30 days, if you have the savings to back you up!
Benefit Period This is how long the policy will pay you for – 2 years, 5 years, until age 65. You do need to watch out here though, as some policies will change ‘definition’ after a certain period – so you may be ineligible for further payment after a certain period.
Lime Tip: We suggest taking the longest benefit period available. Depending on your occupation you may be limited as to what is available, but the cost difference between 2 years cover and being paid until age 65 is only small compared to the benefit.
Occupation This is the occupation which you are classified in. Often when you get “automatic” income protection within a super fund it will be set as a default white collar occupation – if that’s not your job, you may not be able to claim for injury or illness! The other thing to consider here is if your policy covers your Specific occupation, or just ANY occupation that you’re reasonably experienced and qualified in. This can significantly affect your ability to get paid.
Our Tip: Wherever possible we recommend clients take out cover based on their specific occupation. This increases the likelihood you’ll get paid, as well as speeding up the claim!
Premium type There are two main premium types for Income Protection: Stepped and Level. Stepped increases each year with your age, Level does not change. Stepped does however start off much cheaper and people can often be swayed by that initial cheaper premium. Be warned, stepped premiums can increase upwards of 12% a year, and in about 8 years will be more expensive than Level premiums – increasing exponentially faster from there.
Lime Tip: There is no right or wrong on premium type – but if you plan on keeping the policy for more than 8 years, we usually suggest Level premiums.
Disability definition/s This is arguably the most important thing when considering income protection. These are definitions the insurer uses to assess whether you can actually claim. A poor policy will have things like “you must be completely disabled for 7 of the first 14 days in order to go on claim”. A great policy will have multiple definitions which may include
Loss of income: You may be able to continue to work up to 10 hours in your job or earn 20% of your pre-disability income and continue to be on claim and get paid.
Day 1 partial disability – meaning if you are just partially disabled on the first day you may be eligible for claim (instead of completely disabled for 7 days)
Returning to work during the waiting period without effecting your payment: This is extremely important, particularly if you are self-employed!
Tip: This can be complicated – but generally you get what you pay for. Take the Plus/Premium option where available – or speak with us for more help.
Offset clauses You have to watch out for these. Often inferior policies will offset against any or all other income you may be getting, including any compensation you may be entitled to: sick leave, etc.
Lime Tip: You’ll have to read the fine print on this one.
Additional features and benefits Policies can also include specific payments for certain illnesses or injuries can pay out earlier than your waiting period and help when you need it most. An example of that was a client of ours who recently broke his forearm when a motorist clipped him while riding his bike. He is a podiatrist, so obviously needs use of this arm and hand which was in a cast for 4 weeks! Under a conventional policy he would not have received any benefit until the 120th day. With the policy he had, this client received 1-month benefit in his account within 7 days.
Lime Tip: Again, this can be hard to find out – but usually the Plus/Premium options have the better features. Chances are if your cover is 100% paid by super, it doesn’t have any of these features.
Underwriting and Automatic cover. Underwriting is the process of being assessed for your cover. It usually involves a medical questionnaire and may require some tests or a doctor’s report. The benefit here is that when you’re underwritten you know exactly what you are covered for. A lot of super funds will supply automatic cover, which means you have to go through underwriting when you claim. Who wants to fill out an application for insurance when you are actually sick? Not only does this add time to the process, but they can deny you cover and not pay out!
Lime Tip: Get underwritten cover, so you know exactly what you’re covered for.
Was that all too confusing? Luckily, we are specialists in this area and are happy to review your current policy to make sure you don't have a spud!
Lime Tip: Give us a call on 03 9801 8822 or firstname.lastname@example.org for a no cost, no obligation discussion around your insurance needs and help reviewing your cover.