Income protection insurance replaces up to 75% of your pre disability earnings in the event you can not work due to illness, injury or accident. Income protection insurance is essential in any comprehensive insurance plan, allowing you to protect your most valuable asset – your ability to earn a future income.
For example, if a 40 year old, earning $100,000 was on long term claim to age 65 they would receive $3,833,509 in future benefits. (Assuming indexation of 5%pa).
One of the most important features of income protection is to ensure it reflects your level of income prior to any claim. This is why it is crucial to review your income protection on an annual basis.
The majority of income protection policies in Australia do not provide any guarantee of the monthly benefit, due to the fact they are not financially endorsed. What this refers to is the fact that the insured person has not provided the insurer proof of income prior to completing the application for cover.
You have a choice as to which policy you can apply for. There are 3 types of income protection policies available:
- Indemnity – no financial proof is required at the time of application. However you will need to provide proof of income upon lodging a claim. The income assessed will be for the 12 months prior to claim.
- Agreed Value – you provide proof of income at the time of application. In the event of claim no financial proof is required. The amount accepted at application will be that amount regardless of any subsequent rise or fall in your income.
- Endorsed Agreed Value – you provide financial evidence to insurer at the time of application to support the benefit being applied for.
Indemnity cover is often seen as a great option due to the fact the premium is cheaper and minimal effort is required at application time as no financial proof is required. The biggest problem with this type of policy is that it does not provide certainty in the event of claim.
This uncertainty comes about due to the following:
- The availability of financial statements at the time of application;
- The initial monthly benefit will be capped at 75% of pre-disability earnings. This means that you might be paying for premiums for a benefit you will not receive.
- If you have income which fluctuates greatly from one year to the next, you could potentially make a claim after a poor year which would not truly reflect your insurable income at the time of claim.
Agreed Value & Endorsed Agreed value policies provide greater protection for the life insured and most importantly greater certainty.
If you currently have an income protection policy, ask yourself the following:
- Is my existing income protection policy on an indemnity basis?
- Is there uncertainty of the benefit my policy will pay in the event of total or partial disability?
- For Self-employed persons, is my income reliant upon my business performance or has the potential to vary from year to year?
If you have answered yes to any of the above questions, please do not hesitate to contact me for further clarification.
Please contact Tim Ward on (07) 3833 3999 or email firstname.lastname@example.org