Life Insurance: Income Protection And Its Coverage

Life insurance and income protection insurance are designed to protect your financial situation and that of your family in different ways. While life insurance provides a financial safety net for your family in the event of your death or terminal illness, income protection insurance covers lost income if you are unable to work due to injury or illness. This article will explore the differences between these two types of insurance and help you understand whether income protection is included in life insurance coverage.

Income protection insurance vs. life insurance

Income protection insurance and life insurance are both designed to provide financial protection for you and your family, but they cover different circumstances.

Income Protection Insurance

Income protection insurance pays out if you can no longer work due to a severe injury or long-term illness. It provides a monthly benefit, covering up to 75% of your income, calculated based on your previous 12 months' pay. It is designed to cover some of your lost earnings, helping you to maintain your monthly outgoings and continue living your normal life as much as possible. It is a long-term insurance policy, making consecutive payments that act as a regular income until you have recovered enough to return to work or until your policy ends.

Life Insurance

Life insurance, on the other hand, pays out a lump sum to your family or loved ones if you pass away during the policy term or if you are diagnosed with a terminal illness and are not expected to live longer than 12 months. It is a financial safety net for your family, helping them to maintain their lifestyle, pay off debts, cover living expenses and pay for your funeral if you haven't saved anything towards it.

The choice between income protection insurance and life insurance depends on your individual circumstances and financial needs. If you are the sole income provider for your family, life insurance may be a good option to ensure their financial security. However, if you are concerned about being unable to work due to illness or injury, income protection insurance could be more suitable. It is also worth considering that both types of insurance can complement each other, and having a combination of both could be beneficial.

Who is eligible for income protection insurance?

Income protection insurance is designed for those who are unable to work due to injury or illness. It is a form of insurance that covers up to 75% of your income, calculated based on your last 12 months' pay. To be eligible, you need to be employed for more than 20 hours per week.

Different employment types can be covered, including full-time, part-time, and self-employed workers, as long as you meet the minimum weekly working hours. However, not all types of occupations are eligible, and it is important to note that dangerous sports and occupations, as well as back pain for claims of less than 90 days in duration, may be excluded.

When choosing an income protection policy, there are two main types: indemnity value policies and agreed value policies. Indemnity value policies are based on a percentage of your salary when you make a claim, while agreed value policies are based on a percentage of an agreed-upon amount when you sign up. Agreed value policies are generally more expensive but can be useful if your income varies from year to year.

Additionally, when considering income protection insurance, it is important to assess your financial situation and create a budget to understand your monthly expenses and the income you need to replace. You may also want to factor in making payments to your super or other sources of income, such as disability insurance or private health insurance.

In summary, income protection insurance is available to those who meet the minimum working hours requirement and whose occupation is eligible. It is important to carefully review the terms and conditions of the policy, as well as your own financial circumstances, to determine if income protection insurance is right for you.

What does income protection insurance cover?

Income protection insurance provides financial support to you for lost income if you're unable to work due to injury, illness, or disability. It can help you pay the bills so that you can focus on getting better. It is designed to provide your benefit amount to you each month for a period of time, such as 6 months, 1 year, 2 years, or even 5 years, while you are unable to work.

Different employment types can be covered, meaning full-time, part-time, and self-employed workers are eligible, as long as they meet the weekly minimum working hours. However, not all types of occupations are eligible, so it is important to speak to an insurance provider for advice.

Income protection insurance covers up to 75% of your income, calculated based on your last 12 months' pay. You can receive regular payments of up to 90% for the first 6 months and up to 70% of your current pre-tax income for a given time, depending on the benefit period you choose in your policy.

When choosing an income protection policy, you will need to consider whether you want an indemnity value policy or an agreed value policy. An indemnity value policy is a percentage of your salary when you make a claim. If your salary has decreased since buying the policy, you will receive a smaller monthly insurance payment. An agreed value policy is a percentage of an agreed-upon amount when you sign up for the policy. These are generally more expensive but can be useful if your income changes year to year.

You will also need to choose a "wait period" and a "payment period." A wait period is the amount of time you wait from the day you make your claim to when your insurance company starts paying you. This time period could range from one month to 13 weeks, depending on your choice. After the wait period is finished, your insurer will make regular payments to you for the duration of your chosen payment period, which could be for two years, up until retirement, or when you're able to return to work.

Insurers have some exclusions, such as self-inflicted injuries, and criminal activity. However, aside from these, any health issue that keeps you off work is covered.

How much does income protection insurance pay?

Income protection insurance is designed to cover a portion of lost income if you're unable to work due to injury or illness. The exact amount you receive will depend on several factors, including your income, the type of policy, and the length of the benefit period.

Income protection insurance typically pays a monthly benefit of around 50% to 70% of your pre-tax income. Some policies may offer a higher payout, with Suncorp Insurance, for example, providing up to $10,000 a month or 75% of your income. It's important to note that this amount may increase annually in line with inflation.

The benefit period, or the duration of these payments, can vary depending on the policy. Common options include 6, 12, 24, or 60 months. Some policies may also offer shorter or longer periods, such as two to five years, or until you reach retirement age.

Factors Affecting Payout Amount and Duration

Several factors can influence the amount of income protection insurance payout and the length of the benefit period:

• Income: The payout amount is usually calculated as a percentage of your pre-tax income, often based on your earnings in the 12 months prior to your illness or injury.
• Type of Policy: Indemnity value policies base the payout on a percentage of your salary at the time of the claim, while agreed value policies are based on a percentage of an agreed-upon amount when signing up.
• Benefit Period: The length of the benefit period affects the cost of the policy. Longer benefit periods provide greater protection but come at a higher price.
• Waiting Period: The waiting period is the time between when you become unable to work and when you start receiving payments. Policies with longer waiting periods are generally cheaper.
• Age and Health: Your age and health can impact the cost of the policy, as older individuals or those with pre-existing health conditions may be considered higher-risk.
• Occupation: Riskier occupations may result in higher premiums.
• Lifestyle: Dangerous hobbies or an unhealthy lifestyle can also increase the cost of the policy.

It's important to carefully review the terms and conditions of different income protection insurance policies to understand the specific coverage, exclusions, and costs that may apply.

When is income protection insurance paid out?

Income protection insurance is paid out if you are unable to work due to disability, injury, or illness. It is designed to replace your income and help you pay the bills while you focus on getting better. It covers up to 75% of your income, calculated based on your previous 12 months' pay.

The exact terms of when income protection insurance is paid out depend on the specific policy. Generally, there is a waiting period between when you first become unable to work and when you are eligible to claim. This can range from 14 days to two years. The longer the waiting period, the cheaper the policy. After this waiting period, income protection insurance is paid out monthly for a specified benefit period, which could be a set number of years or until a certain age (e.g. 65). The longer the benefit period, the more expensive the policy, but this also means greater protection if you're unable to work for a longer time.

When choosing an income protection policy, there are two main types: indemnity value policies and agreed value policies. Indemnity value policies are based on a percentage of your salary when you make a claim, so if your salary has decreased since buying the policy, you will receive a smaller monthly insurance payment. Agreed value policies are based on a percentage of an agreed-upon amount when you sign up for the policy. These are generally more expensive but can be useful if your income varies from year to year. Since 31 March 2020, insurers can no longer offer agreed value policies to new customers.

Frequently asked questions