Which Type of Insurance Protects Your Ability to Earn Income?

Imagine that you’ve had a serious accident, impacting your ability to work for the next six months as you recover. Would you still be able to pay your mortgage and put food on the table? The answer is no for many people, which is why income protection is so important.

Income protection insurance will protect your ability to earn income if you ever experience a debilitating illness or accident preventing you from working. Keep reading to learn everything you need to know about income protection insurance and why it’s so important.

What is Income Protection Insurance?

If you are unable to work due to an illness or accident, income protection insurance will provide regular payments replacing part of your income, helping you to cover necessary bills like rent and food. You will continue receiving payments until you can work again, retire, die, or reach the end of the policy term – whichever comes sooner.

This insurance policy usually pays between 50% and 75% of your regular income. This means that if you typically make around $6,000 per month, your policy will pay around $3,000 to $4500.

Take a moment to think about what would happen if you were injured and couldn’t work. How long would your savings last? Would you be able to pay your bills this month? In three months? Now think about added medical expenses on top of basic living costs. This is why income protection is so important.

This coverage is not the same as private health insurance – this covers medical treatment. It’s also not the same as critical illness insurance, which pays a lump sum for severe illnesses. Instead, this is a regular payment designed to help you keep up with living expenses while you are out of work.

How Income Protection Insurance Works

There are typically three levels of coverage offered in an income protection policy:

Own income protection: This will kick in when a sickness or injury leaves you unable to perform the job duties required by your occupation.
Suited income protection: This will provide coverage in case you cannot do your own job or any other job that you could take on with your experience and skills. Basically, it covers you if you can’t perform a job for which you are qualified.
Any occupation income protection: This kicks in if you can’t perform any kind of job, even outside your field.

You can also choose between short-term and long-term options:

Short-term income protection: This pays out for a set amount of time, typically between one or two years if you are sick or have an accident.
Long-term income protection: With this option, you will receive benefits until you have recovered enough to return to work, reach retirement age, or die – this means that, in many cases, you’ll be able to receive benefits for several years.

Types of Income Protection Insurance

There are different kinds of income protection insurance for different needs – here are the most common types:

Accident and sickness: This is a standard policy that will pay out if you are ill or injured and unable to work for an extended period.
Accident, sickness, and unemployment: This provides the same coverage as accident and sickness, but also adds in unemployment coverage.
Payment protection insurance: If you cannot work due to illness, injury, or involuntary employment, this insurance will cover debt repayments, like a loan, mortgage, or credit card.
Mortgage payment protection insurance: Also known as MMPI, this will take care of your monthly mortgage payments so that you don’t fall behind, risking your home being repossessed, as you cannot earn an income.
Guaranteed income protection: While this is generally more expensive than other options, it can be cheaper overall if you need protection over the course of several decades. With this option, your monthly premium price will not change unless you want to change your level of coverage.
Reviewable income protection: With this policy, the insurer will periodically review your policy, increasing your premium as you get older. This means that your monthly premiums could get much more expensive over time.
Index-linked income protection: This is when your monthly payout and premium are linked to an index reported by the Office of National Statistics – this means your premiums and benefits could increase or decrease based on the economy.

Income Protection Insurance for Different Employment Situations

While many people have some form of income protection insurance through their employer, like disability coverage, this coverage may not be enough. For example, if your employer has a disability policy that only pays 50% of your monthly income, what do you do about the other 50%? In this situation, it’s a good idea to get a private income protection plan that covers that gap of that other 50%. This way, you’re fully protected between both policies.

Not to mention, many people are self-employed, meaning they do not have any sort of income protection insurance unless they get a private policy. This is why self-employed income protection insurance is very important. If you are unable to run your business due to illness or injury, you can have peace of mind knowing that you’ll be taken care of, allowing you to focus on your recovery rather than struggling to run your business.

Income Protection Insurance for Redundancy

As we mentioned previously, there are forms of income protection that will protect against redundancy – in other words, this is unemployment insurance. This coverage will give you a tax-free monthly payment for up to a year or even longer as you search for a new job. If you unexpectedly get laid off, this is a great way to stay on top of your bills as you work towards a new position.

So, how exactly does unemployment insurance work? You will pay monthly premiums – during this time, if you are made redundant, you can make a claim and receive benefits. You’ll need to submit relevant paperwork, like paystubs and termination documents, for the claim to be successful.

The payout for this type of insurance is usually around 65% to 70% of your gross monthly income. However, insurers might cap the total amount if you have a higher salary.

For example, let’s say you make $40,000 per year. Your redundancy policy pays out 65% of your gross monthly income. You lose your job and file a claim with your insurance company. During the two-month waiting period, you remain unemployed, which results in a successful claim.

You receive payments of $2166 (65% of your gross monthly income) each month for 12 months or until you find a job – whichever comes first. This helps you focus on the job search, helping you get a new job sooner, rather than stressing out about how you’ll pay the mortgage or utility bills.

How Much is Income Protection insurance?

When shopping for an income protection insurance quote, you should be aware of several factors that may impact quotes. The price you pay will depend on:

Salary coverage: It will be more expensive if you want more of your salary covered under the policy. For example, covering 75% of your salary will have a higher premium price than only 50% salary coverage.

Age: The older you are, the more you can expect to pay in premiums. This is because your risk of injury, illness, and death increases with age.

Health: People in better health will pay less for income protection insurance. People with medical issues and preexisting conditions have a higher likelihood of experiencing a severe illness or injury.

Type of job: Certain jobs are riskier than others. For example, construction workers, truck drivers, or deep sea divers have a higher risk of becoming injured while on the job. You may have to pay more if you have an occupation with a higher risk of injury or accident.

Smoker status: Smokers will almost always pay more in premiums than non-smokers since smoking can cause a range of health problems.

Deferment period: This is the period of time between your first day off and when you receive your first income protection payment. You will likely have a lower premium if you have a longer deferment period.

Length of payment period: Short-term policies are generally much cheaper than long-term policies. This is because, with a longer policy, there’s a higher chance that you’ll need to submit a claim at some point within the term.

Guaranteed or reviewable: With an income protection policy, you’ll have the option for a fixed-rate premium, or a premium that the insurer can increase over time. The fixed rate option is usually more expensive upfront but may save you money over a longer period of time.

Common Myths about Income Protection Insurance

Myth #1: Savings alone are enough.

Fact: While savings can definitely help, you’ll likely need at least a year’s worth of savings to get you through an illness or disability that prevents you from working. Not to mention, you’ll also likely be dealing with medical bills – this means that income protection insurance can cover the difference.

Myth #2: Only full-time employees need income protection.

Fact: Anyone who relies on some portion of their income to pay the bills needs a form of income protection. Even part-time employees who supplement their family’s income will feel it if they can no longer work that job. Every bit helps!

Myth #3: You don’t need income protection if you are young and healthy.

Fact: Even people who are young and healthy get unexpected diagnoses and encounter fatal accidents. No matter your age, you want to make sure you are covered if you are out of work for several months or years due to an unforeseen disability or illness.

Myth #4: My employer coverage is enough.

Fact: For many people, their employer coverage is not nearly enough. Your employer plan may only cover 50% or 60% of your income, so what can you do about the other portion that isn’t covered? A private plan can help you fill in the gaps.

For example, if your employer only covers 60% of your income, you can get a private plan covering 40% of your income. This means that with both of these policies combined, 100% of your income will be covered if you are unable to work.

Alternatives to Income Protection Insurance

While nothing can truly substitute for a good income protection policy, you do have a few other options when it comes to protecting your income in the event of an emergency:

Life insurance: While this won’t help you pay the bills while you are alive, it will provide a payout to your loved ones after you die, which can help with outstanding debts and funeral expenses.

Death in service coverage: Some employers offer this form of coverage – it pays out a lump sum to family members if you pass away while working for the company. Typically, it’s a multiple of your annual salary.

Critical illness coverage: This pays out a lump sum if you are diagnosed with a covered illness, and is sometimes included along with other life insurance packages.

Savings: An emergency fund can help you stay afloat if you ever experience a life-threatening condition and are unable to work. While this will usually only help you stay afloat for a few months, every bit can help.

Conclusion: The Value of Safeguarding Your Earnings

Income protection insurance will give you peace of mind, knowing that you can safely focus on your recovery, pay your medical bills, and ultimately, safeguard your earnings. Whether you’re concerned about redundancy or a potential accident, income protection insurance has you covered – literally.

Have questions? Need to know the best option for you and your family? Contact Think Life today for an income protection insurance quote – we’re here to answer every question!

FAQ

Is it worth having income protection?

Income protection can be helpful for people who rely on their income alone to pay monthly expenses. If you don’t have any savings or funds set aside, you need some form of financial protection.

How much does income protection cost?

You can expect to pay between 1% and 3% of your annual salary on income protection insurance.