Are you one of the 75% statistics?
Income cover provides a regular benefit to the insured person if they are unable to work due to serious illness or injury. Most income protection policies will generally provide a monthly payment of up to 75% of the insured's income. This amount may include any commissions, bonuses or fringe benefits that the worker is able to receive.
This benefit provides essential financial support to you and your family so that you can keep on top of everyday expenses and short and long term repayments. This may include food, petrol, education fees, credit card debt, mortgage payments and everyday bills. Essentially, this cover enables you to maintain your current standard of living if your ability to work was suddenly taken away from you.
• 75% of working Australians will be forced to take six months or more off work as a result of a long-term medical condition resulting from sickness or accident.
• Of the claims made for Income Cover, less than 50% are a result of an accident. This shows the importance for having cover in place for sickness, the cause of which will rarely stem from the workplace.
Income Protection Insurance versus Sickness and Accident Cover Income Protection Insurance
• Policies that are issued by life insurance companies.
• Will provide coverage for up to 75% of policy holders income. Some policies will cover up to 80%.
• Policy cannot be canceled by the insurer as long as the policy holder continues to pay their premiums.
• Provider is unable to adjust terms of policy once it has been taken out.
• Offers more comprehensive range of benefits and features to other types of income cover.
Sickness and Accident Insurance
• This type of cover is usually provided by general insurance companies and provides cover for a range of sicknesses and accidents, usually at a fixed rate.
• The insurance company has the right to cancel the policy or refuse to renew the policy once a claim has been made which can leave the insured in an extremely vulnerable position when the may need protection the most.
• Sickness and Accident Insurance policies are usually renewed annually by the provider to enable them the opportunity to increase the premium in-line with age and changing circumstances.
How is Disability Defined
To help you determine the type of cover you may need, you'll need to understand the different disabilities which are covered in insurance contracts. You will probably see one of three definitions of disability, so make sure you understand each one before you sign.
Providers will class disabilities as either total or partial and temporary and permanent. The definition of total disablement will vary among insurance providers but most will use the following characteristics to approve a benefit payment:
• An event such a serious accident or illness suffered by the policy holder
• Inability of policy holder to work due to sickness or accident
• Consequent drop in income from policy holder either being unable to work or unable to work at full capacity
Within this definition, Total Disability is then recognised by Australian Insurance providers under three separate types of:
Duties Based Disability
• This is classed as when you are unable to perform one or more important duties in your role at work because of illness or injury.
• These duties could include manual work, supervision, desk work, meeting with clients or presentations.
Income Based Disability
• Is when you have suffered a reduction in your income because of an accident or sickness?
• The amount of reduction will vary from provider to provider
Hours Based Disability
• Means you are unable to perform your work duties for a certain number of hours per week, for example 10 hours per week, because of sickness or an accident.
• In most instances, policy holders will also need to be under the advice and care of a certified medical practitioner in order to make a successful claim for a benefit
Partial disability means that a person is not totally disabled and is able to work for a certain amount of time or in another occupation to which they were trained in.
• Policy holder will in most cases have to have been continuously disabled for the waiting period (totally or partially)
• Policy holder will in most cases have been continuously disabled since the end of the waiting period (totally or partially)
• Policy holder will still need to be under the advice of a medical practitioner at this time
The partial disability benefit is found by using the formula;
Agreed, Guaranteed Agreed, and Indemnity Value Income Protection
A key factor that must be considered when taking out income cover is whether to take out an agreed value, guaranteed agreed value or an indemnity value income protection policy.
• Agreed value income protection insurance. An agreed value policy means you are insured for the amount of income you are earning at the time of application. To complete your application for an agreed value policy you will need to provide financial documents to your insurer, but you won't need to produce this documentation again if you make a claim. Your monthly benefit amount will then remain the same, regardless of fluctuations in your income over the policy period. This is ideal if you are self employed for example, and are worried about decreasing income levels, or if you are planning to take parental leave.
• Guaranteed agreed value income protection insurance. A guaranteed agreed value policy is a variation of agreed value policy. Under a guaranteed value contract, you will need to provide an up-to-date financial evidence of your income prior to application and the monthly benefits you receive will be guaranteed upfront. No financial documents will be requested at the time of claim to confirm the monthly benefits. It is important to note that this type of contract is only available by select income protection insurance insurers.
• Indemnity value income protection insurance. In this case your income and in turn your benefit amount, are assessed at the time you make a claim. Therefore, when you make a claim you will also need to provide financial documents, so if you income has reduced since you applied for the policy, your benefit will also be reduced, however, if your income has increased, your benefit will too. An indemnity policy can also often be around 20% cheaper in premiums than an agreed value policy, and can be ideal if you are in a steady job, where you receive regular pay raises and bonuses.
How is Income Determined
Insurance companies will general provide cover for the 75% of the persons regular income. Regular income is recognized as their total income ;
• Fringe Benefits
Some companies will allow applicants to gain cover for regular bonuses as their earned income but the applicant must give evidence that they have been received three years in a row.
Income Protection Policy Waiting Periods
The waiting period is the period between the time you make the claim and are unable to work and the time you receive your benefit payout.
Policy holders can usually choose a waiting period of:
• 14 days
• 30 days
• 60 days
• 90 days
• 1 year
• 2 years
The shorter waiting periods usually correlate to a higher premium, as you are asking the insurer to pay your benefits sooner, however, if you have savings which can help you make ends meet for a few weeks or months, or sick leave you can use, you may want to opt for a longer waiting period to make some savings each month. In other cases, your insurer may also include an accident benefit, where the waiting period is waived if you are unable to work due to an accident.
Benefits and Options to Consider when looking at Income Protection Insurance
Standard Built-In Features Many Policies Will Offer
• Agreed Value: Monthly Benefit is agreed upon at the time of policy application. The benefit payable is based on the insured income at that time.
• Indemnity: Benefit is paid based on the insured current income.
• Benefit Indexation: Each year the policy holders sum insured benefit will increase by the increase of the consumer price index to keep pace with inflation.
• Total Disablement Benefit: Benefit paid if insured is unable to work due to sickness or injury as defined by the insurer.
• Partial Disablement Benefit: Benefit paid if insured is unable to work at their full capacity due to sickness or injury as defined by the insurer.
• Waiver of Premium: Premium payments waived if policy holder becomes totally disabled.
• Rehabilitation Expenses Benefit: Benefit paid to reimburse costs associated with the policy holders rehabilitation. This might include an approved rehabilitation program, modification to their home, treatment from an approved medical practitioner.
• Recurrent Disablement: If policy holder returns to work after receiving a disablement payment and suffers the same or a related disablement within a set period, the waiting period will be waived and the claim will be treated as a continuation of the prior claim that was made.
• Terminal Illness Benefit: If policy holder is receiving a benefit, a forward payment of the death payment made to insurer if they are diagnosed with a terminal illness before the expiry date of benefit.
• Death Benefit: A multiple of insured monthly benefit paid to beneficiaries if policy holder dies before the policy expiry date.
• Worldwide Protection: Full cover provided 24 hours a day, anywhere in the world.
• Needle stick Injury Benefit: Benefit paid if policy holder becomes infected with HIV, AIDS, Hepatitis A or Hepatitis C as a result of a splash or needle stick injury that has occurred while performing the normal duties of their occupation. This benefit is normally only offered to medical practitioners.
• Cosmetic or Elective Surgery Benefit: Total Disablement benefit paid if insured becomes totally disabled as a result of cosmetic surgery, other elective surgery or as a result of surgery to transplant an organ from your their body into the body of another person.
Additional Options Often Available on Income Protection Policies
• Specified Injury Benefit: Benefit paid if insured suffers an injury specified by the insurer.
• Bed Confinement Benefit: Proportion of monthly benefit (usually 1/30th) if policy holder is totally disabled and becomes confined to bed and requires the care of a registered nurse.
• Accommodation Benefit: Benefit paid to assist accommodation expenses of an immediate family member if policy holder becomes disabled more than a specified distance from their home and is confined to bed.
• Family Care Benefit: Will pay benefit if policy holder becomes totally disabled and are totally dependent on an immediate family member for everyday needs.
• Overseas Assistance Benefit: Benefit paid to help cover the costs of transporting the insured back to Australia if they are traveling overseas and become totally disabled for more than a specified period of time (usually 3 months).
How is an Income Protection Insurance Quote Determined?
Premiums are calculated based on the level of cover you require, as well as the perceived level of risk that you carry. Providers will often use the following characteristics of a person to help them determine this:
• Your age, as premiums can increase as you get older; alternatively your cover can decrease as you get older so your premiums remain the same.
• Your gender.
• Health and any pre existing conditions
• Whether you smoke.
• Occupation and how dangerous it is perceived to be.
• Dangerous Hobbies such as dirt bike riding or hang-gliding
• How you structure your policy will also impact on your premium repayments. This will include the additional benefits that you purchase for the policy or whether you have a stepped or level premium repayment structure.
Stepped and Level Income Protection Cover Premiums
When you take out a life insurance or income protection policy, you have the option to structure your premium repayments as either stepped or level.
Stepped premiums- Stepped premiums will often start out being a much lower monthly commitment than level premiums, but they will increase each year you hold your policy, until the policy is canceled or your benefit expires. Since your premiums are calculated on your level of risk, when you first take out your income protection policy when you are young, fit and healthy, your chances of making a claim are lower, and therefore so are your premiums; as you get older, the premium repayments increase.
Level premiums- Means you will pay the same premium throughout the life of your policy, outside of cost increases made by your insurer, and cost of living increases. Level premiums start out higher than stepped premiums, but over time, stepped premiums catch up with and often far exceed the cost of level premiums, so level premiums can be the more cost effective option for the long term.
The decision to take out either stepped or level premiums really comes down to the individuals situation. Stepped premiums can be a more affordable option for young buyers without as much disposable income at this stage of life while level premiums may suit buyers who want to know what their premium repayments will be well in advance. The premium structure is a crucial element of the income protection policy and key step for buyers in the comparison process.
What is considered to be Your Insurable Monthly Earnings
The monthly income that you can insure under income protection insurance will consist of a number of different components and often these will vary between insurance providers. Your insurable monthly income is the earnings that you get every month from your primary occupation and by your own personal efforts. It is important to read through the PDS or check with your insurance provider if you have any doubts on which parts of your earnings are considered to be insurable. Your total remuneration packages often include:
• Regular commissions
• Regular bonuses
• Fringe benefits
• Payments for overtime, and
• Superannuation contributions
Insurable monthly income does not include:
• All types of income that you will continue to earn even if you are unable to work
• Other unearned income, such as dividends, interest, rental income, or proceeds from sale of assets
• Income from your other occupations, other than your main occupation
• Ongoing trailing commission or royalties
Paul Douglas-Irving – 317164 – Authorised Representative of PGW Financial Services – AFSL 384713
firstname.lastname@example.org – 0438 232505 – AssetZ Pty Ltd – ABN: 87148895247
Any advice provided in this publication should be considered General Advice as it does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate for you and whether you should act upon it.