What Does Income Protection Insurance Cover?

Income protection insurance is an essential financial safeguard that provides policyholders with a replacement income if they are unable to work due to illness or injury. By offering coverage for a percentage of your salary, typically between 60 – 70%, this insurance ensures you can continue to meet essential financial obligations, such as mortgage repayments, bills, and everyday living expenses, during difficult times.

Key Benefits of Income Protection Insurance

Income protection is versatile and flexible, offering coverage that can be tailored to the policyholder’s needs. Below are the main areas of coverage:

  1. Replacement Income for Illness or Injury
    At the heart of income protection insurance is its ability to replace your lost income if you cannot work due to illness or injury. Whether you are suffering from a severe medical condition, a chronic illness, or have had an accident, this coverage helps to ease the financial burden by providing a monthly benefit to cover your lost wages.
    Common Covered Conditions:
    • Mental health conditions such as depression or anxiety
    • Musculoskeletal injuries like back pain or fractures
    • Chronic illnesses such as cancer, heart disease, or diabetes
    • Major surgeries or medical treatments that require recovery time
    • Injuries resulting from accidents, whether at work or home
  2. Flexible Waiting Periods and Benefit Terms
    Income protection insurance policies offer flexible waiting periods, which is the time you must wait after becoming unable to work before receiving payments. The waiting period is customizable, typically ranging from 30 to 90 days. Longer waiting periods such as 6 months  – 2 years are also available. The longer the waiting period, the lower your premiums will be, but the trade-off is that you need savings to cover your expenses during that time.
    The benefit period is how long you can receive payments once your claim is approved. This can range from two years to until you reach retirement age, depending on the policy. It’s crucial to choose the benefit period that aligns with your needs—longer periods generally come with higher premiums but offer extended financial security.
  3. Coverage for a Range of Occupations and Employment Types
    Income protection insurance is available for salaried employees, freelancers, contractors, and self-employed individuals. This flexibility ensures that regardless of your employment type, you have a safety net if you are unable to work due to health reasons.
  4. Tax-Deductible Premiums
    One of the significant financial benefits of income protection insurance in Australiais that the premiums are tax-deductible, when premiums are paid outside of superannuation.This can help offset the cost of premiums, making the insurance even more affordable for policyholders.
  5. Partial Disability Benefits
    If you can return to work but only in a reduced capacity, some policies offer partial disability benefits. This means if you are working part-time or in a less physically demanding role, the insurance will top up your income to reflect your previous earnings, ensuring you aren’t financially disadvantaged.

What Income Protection Doesn’t Cover

While income protection insurance covers a wide range of scenarios, there are some exclusions to be aware of. Common exclusions include:

  • Pre-existing Conditions: Conditions you were aware of or had before taking out the policy are usually excluded unless specifically stated otherwise. All applications are subject to underwriting. 
  • Intentional Self-Harm or Suicide Attempts: On some policies, claims related to self-inflicted injuries or suicide attempts are generally not covered.
  • Unlawful Activity: Any injury sustained while committing an illegal act is not covered by income protection policies.
  • Substance Abuse: Claims related to drug or alcohol misuse are often excluded.

Choosing the Right Policy for Your Needs

When selecting an income protection policy, it’s essential to assess your financial situation, occupation, and health to find the right balance between cost and coverage. Consider the following factors:

  • Waiting Period: Decide on a waiting period that aligns with your savings and financial buffer. If you have substantial savings, you may be able to afford a longer waiting period, reducing your premiums.
  • Benefit Period: Consider whether you need long-term coverage or if a shorter benefit period is sufficient. If you have a stable financial plan, a two- to five-year benefit period may suffice. However, if you rely heavily on your income, a benefit period that lasts until retirement may be worth the higher premiums.
  • Amount of cover: It is important to consider how much of your income you will need to protect. You can cover between 60 – 70% of your pre-tax earnings.

How to Make a Claim

Safety Nest will help out with this process to relieve the already stressful time.

Making a claim on your income protection policy typically involves a straightforward process:

  1. Notify Your Insurer: As soon as you are unable to work, notify your insurer and provide the necessary medical documentation from your doctor or specialist.
  2. Complete a Claims Form: You’ll need to complete a claims form outlining the nature of your injury or illness and provide proof of income, such as pay stubs or tax returns.
  3. Wait for the Waiting Period to Pass: Once your waiting period has passed and documentation has been completed, your adviser will assist in submitting the claim to the insurer. Once your claim is approved, your insurer will begin making payments to replace your lost income.
  4. Ongoing Documentation: Some insurers may require periodic updates from your doctor to ensure you are still unable to work due to your condition.

Final Thoughts

Income protection insurance offers invaluable peace of mind, ensuring that if you are struck by illness or injury, you won’t face financial ruin. By selecting the right policy, customising it to your needs, and understanding its scope and limitations, you can protect your most valuable asset—your ability to earn an income.

With flexible options, tax benefits, and comprehensive coverage, income protection insurance is an investment in your future, offering financial stability when you need it most.

Secure Your Family's Financial Future

Talk to our expert advisors about your insurance options. We offer flexible times, so book your no obligation online consultation today and start planning for tomorrow.

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