Income protection insurance is worth considering for all working people. It can pay a proportion of your salary if you’re temporarily unable to work because of sickness or injury. We have collected some industry statistics that outline the importance of protecting you and your family.
In 2010, Comminsure paid $63 million to nearly 3000 customers with an average monthly benefit of $5090. None of these customers expected to claim on their insurance – but they had to. Fortunately, they had planned for the unexpected. See below an outline of the claims and their duration.
Causes of Income Protection Claims
- 36% accidents
- 24% sickness (MS, carpal tunnel syndrome, stroke etc)
- 13% psychological
- 9% back
- 8% cancer
- 7% unemployment
- 3% for heart conditions
Duration of the Claim
- 46% of claims lasted less than 6 months – reflected by the large percentage of accident claims
- 18% of claims exceeded 3 years
- 4% exceeded 10 years
The length of time you receive payments depends on the contract term; for example two years, five years, or up to age 60 or 65. It varies depending on the amount of cover you are willing to pay for.
For a young single person with no dependents who doesn’t need to consider the costs that might affect their family should he or she die, income protection (IP) or critical illness insurance could be the most relevant type of life insurance. They are designed for when it’s more important to meet the costs of ‘living’ than ensuring family members receive a payout after your death.
What type of cover should I get?
There are two types of income protection insurance: indemnity and agreed value. Indemnity policies can be provided by superannuation funds and premiums deducted straight from the member account.
- Agreed value insurance, the most expensive option, pays out the benefit agreed to reflect your income at the start of your policy, and is not affected by any fluctuations in income.
- Indemnity value policies, which are more common and less expensive, verify your income at the time of making a claim and may adjust your benefit accordingly. This can be an issue if your salary fluctuates, for example if you have taken maternity leave, worked part time or become unemployed.
- Policies provided through superannuation funds are the cheapest option, are indemnity value-based, and offer fewer features and less flexibility.
There are benefits to all three types of policy. Agreed value, which will cover you regardless of employment status, is particularly useful for self-employed people. For those who have a reliable, regular income, an indemnity policy may suffice. Some superannuation funds offer IP as default cover and automatically accept applications without medical checks – and offer a choice for those who would otherwise not be covered.
How much do I need?
The amount of income protection insurance you need will be determined by the salary you want to insure. Generally income protection provides cover for about 75% of your salary in the event of illness or injury preventing you from working.
You need to consider what the costs are of meeting a mortgage and other debts; providing for a spouse, children or other dependents; and maintaining your assets and investments. Remember the point of income protection insurance is to provide an income stream if you can no longer work.
What are premiums based on?
- Age (premiums may increase or cover decrease as you get older)
- Gender
- Health and pre-existing conditions
- Whether or not you smoke
- Occupation (for example, a manual laborer pays different premiums to an office worker)
- The time you choose to wait before receiving payment.
It may happen to you. Plan for the unexpected.
If you wish to discuss your insurance options with an expert, contact Chris Flook on 3275 7433 or email chrisflook@kmwaccountants.com.
Reference: The Risk Store, www.theriskstore.com.au & http://www.choice.com.au/reviews-and-tests/money/insurance/personal/income-protection-insurance.aspx
