An income protection policy is one that offers cover against disability but instead of paying you out a lump sum, it pays an ongoing income benefit.
The benefit is typically based on your current income and can be paid until you reach your chosen retirement age – anything from age 55 to age 70.
Typically you would need to be disabled as defined by your inability to work, but some policies pay an income benefit for those unable to do certain activities of daily living and in some cases an income benefit for impairment may extend for the whole of your life.
The advantages of income protection over a lump sum or capital disability cover are:
1. It most closely matches your income need
If you use cover with a lump sum benefit to cover your income needs, you will face a number of risks including:
If you take out an income protection policy, the life insurance company carries the risk of ensuring you are paid the income for which you are insured each month.
Although you should always get individual advice that relates to your unique circumstances, an income protection policy may give you better protection than a lump sum benefit for your ongoing income needs.
A lump sum, however, is useful to pay off debt such as your home loan.
2. It can give you protection against temporary disability
An income protection policy can offer cover for a temporary disability or for the period it takes a life insurer to establish whether or not your disability is permanent.
Industry research reveals that you are much more likely to suffer from a temporary disability than a permanent one, yet very few people have cover for temporary disabilities.
Lump sum disability policies generally do not pay out a lump sum disability benefit unless your disability is confirmed by a medical practitioner as permanent.
If, for example, you contract cancer, but there is a chance you may recover after treatment, you will not be paid out on a policy that insures you against permanent disability.
However, you may be able to claim on an income protection policy that offers cover for temporary disability.
Temporary income protection policies offer you cover for a temporary disability usually for six, 12 or 24 months.
3. Cover for partial disability
If your disability is one that compromises you, but does not prevent you from working altogether, it may be what life insurers term a partial disability.
While you may qualify for a lump sum benefit on a policy that uses a physical or functional impairment definition of disability, you may not qualify for a benefit on a policy that defines your disability in terms of your inability to work.
Your disability may leave you unable to work at the same level or pace as you were before, but not incapable of doing some work.
If you have an income protection policy, your life company will consider the income you have lost, or the percentage of duties you can't do versus those you can, and may top up the income you continue to earn.
4. Add on benefits
Income protection policies may also have add-on benefits that could come at an additional cost, but can provide income support if your child or spouse is diagnosed with a severe illness or dies.
Some policies offer retrenchment cover that pays you the income benefit for which you are insured for a certain period if you are retrenched. Retrenchment benefits are only available to those who are employed full time, and, not to contract, casual, seasonal, part-time or temporary workers or those whose income is largely commission-based. Certain industries are typically excluded. It can also not be purchased by self-employed people or directors of companies.
Cover for your business overhead expenses or to hire a locum to continue your practice are other benefits offered to business owners and professionals who are disabled.
