What is income protection?

What exactly is income protection? This is a type of insurance provides a replacement income stream should one become unable to work due to an injury or sickness and benefits are paid monthly, not as a lump sum.

The amount of cover is restricted normally to 75% of the individuals (gross) salary / remuneration. Some insurers allow adding a superannuation contribution as part of the gross salary or will separate it.

Bear in mind, premiums take into account a number of things like the occupation duties, level of cover selected, smoking status, gender and state where the individual lives, to take into account stamp duty.

There’s also a number of key things to take into account when purchasing income protection insurance. When you purchase income insurance, you will be put into a ‘waiting period’ or ‘excess period’, which is the time that you must wait before the insurer starts paying.

While premiums with shorter waiting periods are more expensive, the longer the benefit period is.

Income protection insurance waiting periods are typically 14 days, 30 days or 90 days.  However, it may take up to 30 days after the end of the waiting period to receive the first monthly payment depending on the insurer’s payment cycle. Waiting periods of up to 2 years are also available to supplement superannuation fund policies or group insurance generally provided by an employer, these typically end after 2 years of payment.

Income protection insurance benefit periods are typically 2 years, 5 years or to age 65, with some insurers also offering to age 70. The benefit period is different to the expiry age of the policy which is when the policy can no longer be renewed.  Income payments will stop when the benefit period ends.  Therefore, the longer the benefit period the better.

Is redundancy or involuntary unemployment covered by income protection insurance?

Normally policies do not pay a monthly benefit if you are made redundant or involuntarily unemployed. Contracting COVID covers you once the waiting period is met however no payment is made in the event of losing ones’ job as a result of business closure and being let go from employment.

Should unemployment benefits be included in an income protection policy these benefits are usually limited to a very short period of time for example three-months.