Ask an Adviser - Are All Income Protection Insurances The Same?

Top answer provided by:

Leigh Morris

Firstly, thank you for the question. Income protection insurance plays a crucial role in wealth protection but one that’s often overlooked due to cost and complexity.

Before I discuss how income protection policies can differ, I firstly want to explain why there is a need for income protection to begin with. A simple way of doing this is to try the below exercise;

1. Create a basic budget listing your income at the top and all expenses underneath. This would include rent/loan repayments, bills, groceries and general living expenses.
2. Put your finger over your income at the top of the budget leaving only the expenses.
3. How would those expenses be met if you were unable to work due to sickness or injury?

It’s a confronting exercise but one that stresses the importance of correctly covering your greatest asset, you. Think of ‘healthy you’ as plan A, we all hope to live a healthy injury free life but unfortunately in reality that’s rarely the case. Insurance cover gives you a plan B to allow you to keep moving forward while you’re down and out.

As each person’s circumstances are vastly different, so too is the income protection cover needed to correctly cover them. When looking at the appropriate income protection for your specific needs the below points should be addressed;

Underwriting - This is a health assessment that is completed by the insurer either before the insurance application is accepted or at the time a claim is made. The underwriting process can become quite lengthy as it involves obtaining details of your medical history and further information from your doctor could be requested.

Some insurance providers advertise a painless application processes, with no medical or underwriting requirements needed. This is true, until claim time where you will be asked to provide all information for assessment. The underwriting team can then reject your claim meaning no payout will be provided and past premium costs are not reimbursed.

For this reason, completing the underwriting requirements before commencing the cover means the provider will pay a claim based on the pre obtained medical information. This provides peace of mind that the claim will be accepted and payment will be provided which is what counts most when it comes to insurance.

Holding the policy inside or outside of super – Holding income protection through super may be beneficial if cash flow is tight. Alternatively, if you’re trying to maximise super contributions and potential growth, holding the policy outside super could be more appropriate.

Stepped or Level premium structure – Stepped premiums increase each year as you get older whereas Level premiums are not tied to age. When looking at Stepped vs Level, the cost of the policy and time frame held both need to be considered to determine the appropriate premium structure.

Agreed Value or Indemnity cover – Agreed value means that the cover is calculated when the initial application is submitted. It’s suited to those with fluctuation incomes such as small business owners and the self-employed. Conversely, Indemnity cover is calculated at the time of claim and it better suited to those on a steady income that is unlikely to decrease.  

Waiting & Benefit Period – The waiting period refers to the time frame between a claim being submitted and the commence of the payout beginning. For example, an employee with 20 days’ annual leave and 10 days’ sick leave may choose a ’30 day waiting period’ due to annual and sick leave being able to cover the period until payout begins. Once payout begins, it will continue until the policy holder is able to return to work or the benefit period ends. A typical benefit period could last for 2 years up to age 65.  

It pays to speak with a trusted insurance adviser to guide you through the decision making process and avoid the life insurance industry traps which unfortunately are all too common. In this day and age, it’s tempting to purchase a policy online to save time and money but purchasing the wrong policy could end up costing you more of both.

Think of income protection as an investment in your future, speak with a professional about the options available and take time to understand the cover you’re putting in place. A little more time spent now could make a huge difference down the line.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Leigh Morris

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