What is income protection – Income Protection Definition
Income protection insurance is a of insurance policy where individuals (policy holder) pays a premium to an insurer in which in an event of sickness or injury causing disability the policy holder is unable to work. The insurer will provide a monthly income at a preset level over a given period.
An example would be the policy holder earning $4000 a month pays a a premium of $50 a month.If something happens to the policy holder where they will not be able to work. The insurer will agree to provide 90% of that income for 2 years.
The advantage of income protection is it is able to provide individuals income during the rehabilitation period. In addition to filling the income gap where you are not able to work, there will be incometo cover day to day expenses and the recovery treatment costs.
Related: Check out our AUD vs USD post on the analysis of the Australian dollar.
List of events usually covered in income protection policies include:
- Cancer (bowel, breasts, prostate and other cancers)
- Heart attack and disease
- Mental illness
- Central Nervous System Disease
- Respiratory System Disease
Income protection Australia vs total disability cover (TPD)
Insurers usually sells income protection with a total disability cover. The difference between the two is that total disability cover provides a one off lump sum payment in the event that the policy holder suffers from an adverse circumstance where they suffer from total and permanently disabled. Income protection in this case provides in stream of income over a agreed period.
Advantage of life insurance income protection in superannuation
Similar to TPD cover, life insurance is also typically sold in conjunction with income protection insurance. There are a number of benefits for Super funds allowing members to purchase insurance in the fund:
- Tax advantage of premiums paid from superannuation account versus after tax income from insurance purchased outside super
- Super fund trustees usually have agreements with a set insurer where all members will be insured through. This increases the purchasing power and hence lower cost for all members.
- Automatic management of premium payments and always have funds available to maintain insurance coverage even if there is a financial setback.
For those that think the funds would be better invested and still require the insurance coverage. Then think of contributing a little more to make up for the loss in premium payments. This allows individuals to keep the tax and bulk purchase benefits which would be hard to replicate individually.
Income protection for redundancy
There is no policies that will provide income protection for redundancy. The earning protection policies sold covers only health related events that result in individuals unable to work. There are more general insurance policies that can provide a level of cover in the event of redundancy. These can be included with credit cards where in event of redundancy, the insurer will pay off a portion of credit card payments.
Income protection for business (tax deductible)
If individuals are self employed, then there are income protection policies to provide income in event of adverse event. The advantage of income protection for business is in most circumstances the insurance premium is tax deductible.
Best Income Protection Insurance Australia
To find the best income protection insurance in Australia, you have to compare the various features versus the cost of individual policies.
Key income protection comparison features
- Income protection insurance cost
Cheap income protection policies does not mean it is the best. The way we look at income protection is that it is used to manage unanticipated risks in life. We would rather pay up today so that in an unforeseen event we know we are covered and have the best policy rather than save a few dollars and get the cheap income protection policy that would not necessarily cover all events.
There are alot of income protection comparison sites that can provide income protection online quote. We suggest you use look past the price and understand the underlying features to make so the right decision can be made.
2. Income protection waiting period
Income protection policies usually comes with a preset waiting period before the policy can be claimed. For example the underwriter or the policy set out a set timeframe of 30 or 60 days before the income is to be paid.
The choice is based on personal preference and individual choice. The shorter waiting period, the relatively higher premium. The income protection waiting period also could differ to TPD waiting period.
Is income protection worth it?
Our day job is investment which is managing risk and return. All decisions are weighted through a cost and benefit analysis. As with everything there is a cost and benefit. The cost is the immediate premium paid with the benefit of income when you needed the most. We are not in the insurance sales business so we can make the choice based on our own individual circumstances.
Every individual circumstance is different. For risk averse investors, income protection can provide extra level of peace of mind in the unforeseen journey that is life. They can give up a little immediate cost with a greater piece of mind.