In the last two years, we’ve seen how essential it is to prepare for whatever life throws at us. Unfortunately, even with our best intentions and efforts, unexpected things can happen—especially regarding our finances.
You should, therefore, consider income protection insurance when planning your financial situation.
It helps safeguard yourself and your family against the risk of becoming unable to earn an income due to an illness or injury. It can be easy to overlook this vital insurance in many cases, but having a quality plan in place can provide peace of mind and security.
Overall, understanding income protection insurance is key to ensuring that you have a comprehensive financial plan — one that will help ensure that you and your family remain protected in case of any unforeseen events that could leave you without a source of income.
With a better understanding of the benefits of this type of coverage, it should become easier for anyone looking for reliable financial security with monthly payments in their future plans.
Here’s what you need to know.
What is Income Protection Insurance?
Income Protection Insurance provides financial protection by replacing some or all of your income in the event of illness, injury, or any other circumstances that prevent you from working. It can be tailored to suit your particular situation and income level and typically pays up to 75% of your monthly pre-tax income.
This monthly benefit can help cover living costs such as rent or mortgage payments, utility bills, medical expenses, childcare fees, and more until you can resume work or retire.
Let’s say John is a plumber who makes his living doing repairs and installations in people’s homes. Then, one day, he slips and falls while on the job and breaks his leg. Unable to work for the next several months, John can’t earn any money to pay his bills or support himself.
Fortunately, though, John had taken out an income protection insurance plan before this unfortunate event, which pays him a certain percentage of his regular income while unable to work due to his injury.
So, in this case, rather than worrying about how he’ll pay his bills without any income, John has some financial security through his income protection insurance plan.
Understanding How Income Protection Cover Works
To claim an income protection policy, you’ll have to first serve a waiting period, typically between two weeks and three months. This length of time symbolises the gap between your first day off work and your eligibility to claim benefits. So naturally, the shorter the waiting period, the more expensive your policy will be.
Once you have served the agreed-upon waiting period and can provide proof of your inability to work (such as through doctors’ records and expert opinions), you’ll start the benefit period and can expect to receive monthly income protection insurance payments from your insurer. It’s worth mentioning that these payments are yours to use as you please to help cover living expenses and other costs during your period of unemployment.
In some circumstances, if you suffer an injury and can still work part-time but can only carry out limited duties, you may be eligible to claim a reduced benefit through your income protection insurance. In addition, some income protection insurance policies allow you to opt-in for extra coverage for partial disabilities that occur due to illness or injury, such as fractured bones.
This type of coverage provides a portion of your income while you cannot work due to injury or illness.
What Doesn’t Income Protection Insurance Cover?
Income insurance protection does not cover a variety of situations that could lead to a loss of income. These include situations such as:
- Voluntary resignation from work
- Where an illness or injury lasts for a period shorter than the policy’s waiting period
- Pre-existing conditions
Taking Out Coverage and Claiming
To take out income protection insurance, you can contact an insurance provider directly or use the services of a broker, who can offer tailored advice based on your individual circumstances and needs.
When taking out income protection insurance, you must decide how much coverage you need. It is vital to get the right amount of coverage. You will also need to determine your waiting period.
Once you have taken out income protection insurance, claiming from your policy is relatively straightforward. In most cases, you will need to fill out a claims form outlining the details of your claim and provide evidence such as medical records.
The insurer may also ask for additional documents, such as tax returns or bank statements, if they require further verification of your income. Once all the necessary information has been provided, the insurer will review your claim and advise how much they’ll pay under the policy terms.
Income Protection Insurance FAQS
Here’s a list of frequently asked questions about income protection insurance coverage.
- Are There Any Restrictions on Who Can Take Out Coverage?
In general, most insurers will only provide coverage to people between the ages of 18 and 65 who are employed or self-employed and earn at least $2,000 per year. However, the coverage an insurer will provide will also depend on factors like occupation, age, and health history.
- Do I Need Medical Tests Before Taking out a Policy?
Most insurers may require you to take a medical examination before taking out an income protection insurance policy, depending on your age and existing health conditions. This helps them assess the risk involved in offering you coverage and determine rates accordingly.
- How Much Do the Income Protection Insurance Premiums Cost?
The income protection insurance cost depends primarily on how much coverage you take out and factors such as age, current health status, and habits. Generally speaking, premiums start at around $50 per month but can go up depending on the abovementioned factors.
- Are Premiums Tax Deductible?
Yes, according to the Australian Taxation Office (ATO), you’re generally eligible to claim a tax deduction for your income protection premiums. However, you should seek advice from a qualified accountant before claiming any deductions at tax time if you are unsure about this matter.
- Can I Take Out Cover Through My Superannuation Fund?
Yes, some superannuation funds offer members access to income protection policies, which often come at lower costs than individual policies outside super funds. However, it’s important to note that this type of cover usually comes with limits on the benefits you can claim relative to other individual policies outside super funds, so always seek professional advice before making any decisions regarding this matter.
Income protection coverage is an important form of insurance to include in your financial plan. It can provide a valuable safety net and peace of mind if you experience a financial crisis due to an unexpected accident, illness, job loss, or other events out of your control.
You should consider consulting with a trusted financial advisor to gain insight into the best options for your individual circumstances and create a tailored income protection package that meets your needs and budget.
In addition to helping you select the most appropriate coverage policy, advisors can also guide how to diversify investments and increase savings to build long-term financial security.
Ultimately, income protection coverage should be part of an overall strategy for financial planning so that you are prepared and protected against any eventualities.
KNS Accountants and Business Advisors have the experience and knowledge you need to develop a comprehensive financial strategy. We take the time to understand your unique situation and goals and create a customised plan that considers all of your factors. So whether you’re looking to put the necessary income protection measures in place, save for retirement, reduce your tax liability, or simply get a better handle on your finances, we can help.
Contact us today to learn more about how we can help you achieve your financial goals.