Tips and traps of Income Protection Insurance

Income protection insurance pays a pays a regular benefit equivalent to up to 75% to 80% of your income if you are unable to earn that income for a period of time due to sickness or injury.

When taking out an income protection policy, it pays to remember to declare all income components, not just your salary. If your income protection benefit is calculated taking into account additional income items such as regular overtime payments, car allowances and fringe benefits such as a novated lease, you will find your recovery period much less stressful.

Understand your income protection insurance terms

It is also important to understand the various terms used in the income insurance policy, and the implications of making choices based on price rather than on your possible needs. For instance, the term ‘waiting period’ refers to how long you will have to wait from the time you are unable to earn, until the time the income protection benefit payments begin. Choosing a longer waiting period may help to reduce your premiums, but if you do not have enough accrued leave to cover you during this time, you could be without any income at all from when your leave is exhausted until the waiting period expires.

Income protection insurance through your employer

If you change employers and are unable to transfer accrued leave entitlements, your original chosen waiting period could prove to be too long should you need to claim on your income protection policy after moving to your new employer. And, if you are promoted and increase your mortgage or other financial commitments, you may find that your income protection benefit falls short of covering those commitments as it has been calculated based on an earlier, lower income.

While income protection insurance can provide peace of mind and help to protect your assets in the event that you are unable to earn your regular income, it is still important to ensure that you review your needs regularly and ensure that your income protection benefit and waiting period will be appropriate for your needs.

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May 2007