Income protection is an insurance policy that covers costs if you are unable to work due to an illness or an injury. Previously known as permanent health insurance, income protection usually pays out until you die or retire. There are some short-term income protection policies available as well that last for a few years and do not cost as much.
Income protection, both short and long-term, pays out if you are made redundant due to illness or injury.
Income protection must not be confused with critical illness insurance, however. Critical illness insurance pays out a lump sum in case you fall seriously ill.
How is income protection insurance different from payment protection insurance?
Income protection insurance is vastly different from payment protection insurance (PPI). PPI provides coverage for specific debts and the payouts that are directed towards the lender. Income protection gives you a tax-free percentage of your salary provided you are unable to work due to injury or illness.
Why do you need income protection insurance?
There is a very small percentage of employers who support their employees for more than a year if they take an off from work due to health reasons. You should consider income protection because the state generally does not provide many benefits.
While most of us have some form of insurance (life insurance, private health insurance, payment protection insurance, etc.), income protection is not very common.
What is the cost of income protection?
The price of income protection plans depends on the nature of your job and your health status. Jobs are generally categorized into four groups depending on their risk. The higher the risk associated with the job, the greater is the chance of making an insurance claim.
The four groups are as follows:
1) Class 1: Professionals, managers, administrative staff, clerks, computer programmers, staff with limited business mileage
2) Class 2: Skilled manual workers, engineers, florists, shop assistants, staff with high business mileage
3) Class 3: Skilled manual workers, semi-skilled workers, plumbers, teachers, care workers
4) Class 4: Construction workers, heavy manual workers, unskilled workers, mechanics
The riskiest group, therefore, pays the highest amounts in premiums.
How much coverage does income protection provide?
Income protection coverage is typically based on a percentage of your earning. The average percentage varies between 50 and 70%.
When does income protection start providing coverage?
Income protection starts payouts after a pre-agreed period has passed. This period can range from one month to a year after you file for a claim.
Generally, the longer the deferral period, the lesser would be the amount you pay in premiums. The default deferral period typically ranges between 13 and 26 weeks. However, it can be as short as four weeks also.
The payout time also depends on your insurance provider’s understanding of your ineligibility to work. Insurance providers usually use three methods to assess one’s ability or inability to work. These include:
1) Activities of daily living:
Activities of daily living include your ability or inability to perform everyday tasks like walking, climbing the stairs, using the toilet, changing, showering, etc. If you are cannot perform three or more of these tasks, your income protection will pay out.
Although cheaper, these plans are not as good. The insurance provider has the authority to define your ability or inability to work. The insurer may turn down your claim if you can carry out everyday tasks regardless of the status of your internal health and functioning capacity.
2) Suited occupation income protection:
Suited occupation income protection means that your insurance provider acknowledges your inability to work. However, they may refuse to pay you the claim if they feel that you can work in a similar capacity as your suited occupation.
Suited occupation income protection is a better option compared to activities of daily living plans.
3) Own occupation income protection
Own occupation income protection pays out your claim if you are unable to do your job. Your insurance provider does not have the authority to assess your abilities, nor can they suggest you take up a role similar in nature to your previous one.
Own occupation income protection provides the highest level of security if you fall ill or sustain an injury that deems you unfit or incapable of work.
Stepped benefit income protection: What you need to know?
When picking out an income protection policy, you should check what sickness benefits your employer would be willing to pay for.
Employers may choose to pay you in full for a period and then proceed to reduce payments. Stepped income protection comes to good use in such cases. With stepped benefit income protection, you can choose two different payment levels at different time periods.
What else does income protection provide coverage for?
Income protection policies come with an array of benefits, including the following:
1) Hospital payouts: Some income protection policies pay a percentage of your income protection if you are admitted to a hospital, even if it is before the deferral period is over.
2) Premium waivers: This benefit excludes you from paying premiums while claiming your income protector coverage plan. It means that you don’t have to pay anything to your insurance company if you have filed a claim. It can be availed in case of a disability or accident.
3) Life insurance: Most income protection plans come with life insurance, equivalent to one year or two years’ worth of monthly premiums.
4) Back to work payments: Many income protection providers do not halt payments even after you go back to work. In case your earnings are reduced due to health reasons, your income protection will continue paying out until your earnings are recovered to the level when you bought the policy.
5) Deferral period waiver: Some insurance providers waive the deferral period if you have already made a claim once and fall ill again within a year. This way, you will not have to wait to get a payout.
Income protection plans aim to provide you with security in case your health is compromised, and you are unable to work. Refrain from investing in a cheap plan. You must carefully consider the benefits to find the plan that works best for you.