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What Is Income Protection?

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Last editedJul 20212 min read

Accidents happen and income protection exists to provide financial support to those out of work due to injury or illness. Also known as permanent health insurance, income protection does not replace a person’s full earnings. Rather, it amounts to about 50-70% of the individual’s pre-tax earnings prior to being out of work, and it usually takes a minimum of four weeks before income protection payments are made on a claim.

What to know about income protection insurance

Do your research before deciding whether or not to enroll in an income protection insurance plan. Some things to consider include:

  1. Level of cover – Determine the amount of income protection you’re likely to need by taking away state benefits, work-related expenses and extra costs that may be incurred in the event of injury or illness from the amount of your current take-home pay.

  2. Exclusions – Find out what types of illnesses are covered and which aren’t; for example, some companies have added COVID-19 exclusions to income protection as well as business insurance.

  3. Pre-existing conditions – Along the same lines, find out if the company covers existing medical conditions; some do and some do not, depending on the policy and your medical history.

  4. Job category – How dangerous is your job? Shop around as different insurers may assess the same job differently.

  5. Payment amount – How much money will you get from a claim?

  6. Waiting period – How long will it take to begin receiving payments after filing a claim?

  7. Premium amount – Compare the cost of income protection insurance among different companies; premiums are affected by factors such as age, health, job, hobbies/lifestyle, waiting period, and ability to do alternate forms of work during your illness and/or convalescence.

  8. Cancellation policy – Understand the terms and conditions should you wish to terminate your policy as well as cancellation for missed premium payments.

Kinds of income protection insurance

There are different kinds of income protection insurance plans. An index-linked policy, for example, accounts for inflation. So the amount of payment increases each year, as does the premium, in accordance with the rising cost of living.

Stepped income protection allows the insured to reduce or increase the level of payment at different time periods. This can be useful for individuals receiving sick pay from an employer for a designated length of time.

Other types of income protection insurance include group income protection and self-employed income protection. Group income protection is sometimes offered to employees through their place of work. Such policies are paid for and managed by the employer and may include rehabilitation services, counselling, training and other forms of wellness support.

If you work for yourself, a self-employed income protection plan may be wise. Proof of income is required, often for one to three years prior to enrolment. If unable to provide such proof, there are policies available, but premiums may be higher in these cases.

Other income protection options

Critical illness insurance is an alternative to income protection insurance and might be best for those on a budget. However, it covers a more limited range of health conditions over a shorter time period than income protection insurance. Some insurers pay this type of policy out in a lump sum, too, rather than incrementally.

Accident, sickness, and unemployment (ASU) policies are also a cheaper alternative, but there is less guarantee of cover and some consider the payout too low to warrant the cost.

Be sure to seek the advice of an impartial, independent broker to determine what kind of policy best matches your needs, circumstances, and financial resources.

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