What Is INCOME PROTECTION Insurance?

And so we move onto the fourth, and last, type of life insurance - Income Protection (IP).

IP insurance is designed to pay you an ongoing income stream equal to 75% of your regular income in the event that cannot work due to illness or injury.

What It’s Not

IP insurance is only for those times when you are unable to work due to health-related reasons. It doesn’t cover redundancy, or unemployment.

It’s there to replace part of your income to give you the chance to get back on your feet, without being financially devastated by being unwell.

Why 75%?

Generally, it’s the most they’re allowed to pay because they want you to have an incentive to return to work.

If you’re getting 100% of your income, why go back to work?

Like Chalk and Cheese…

If the different life insurances were high school kids, IP would be the victim of constant bullying. It is just so different to all of the other types.

  • Where term life, TPD and trauma pay lump sums, IP pays a regular income stream.
  • Where you (generally) only claim once on the other three, you can claim multiple times on IP.
  • There is only really one variable in your control when it comes to pricing (benefit amount) the other types of insurance - IP has at least five.
  • Where the other premiums give you no tax benefit, your IP premium can be fully tax deductible.
  • Where you shouldn’t be paying tax on the benefit payments on any of the other three, IP is normally fully tax assessable. (Of course, always check with your accountant for the impact on your personal tax situation).

It’s All About the Timing…

Be aware that most IP policies pay benefits monthly, in arrears. So, if you have a 30-day waiting period, expect to get paid up to 60 days after claim.

Who’s it For?

Income Protection insurance is vital for:

Principal Breadwinners

If, as the breadwinner in your household, your income were to stop tomorrow, what would be the consequences? Not only would you be dealing with some serious health issues, you’d also be worrying about how you would pay your bills and provide for your family.

People With a High Level of Debt

According to the statistics, there is a very good chance you fall into this category.

While we can provide for this debt with the other three insurances, Income Protection will help you to maintain the payments now and provide for your other needs.

Single People That Rely On Their Income To Maintain Their Standard of Living

Perhaps the most neglected group when it comes to life insurance, we think that people under 30 really need Income Protection insurance. Unfortunately, health issues can arise and thanks to the combination of high debt, high living costs and the possible loss of potential earnings, their need for IP cover, in particular, is quite acute.

Keep it on the Level

Getting into Life Insurance, and Income Protection, when you’re younger makes sense - especially when you lock in the premiums using a ‘level’ premium structure.

You’re going to have the cover for longer, so you’ll see the long-term savings.

Every year you keep the policy after the ‘break-even’ point, you’re ahead.

Continue reading: Do I need Life Insurance