What is income protection insurance?

In looking at various forms of person insurance so far I have covered

• Life Insurance: An insurance that pays out in the event that you pass away.  In my previous post I mentioned that people who have dependents should definitely have life insurance but singles and those who are financial settled probably do not need it.
• TPD Insurance: An insurance that pays out in the event that you are so disabled that you are no longer able to work (but does not pay out if you pass away).  In my previous post I had mentioned that I thought that EVERYONE should have this type of insurance, whether you have dependents or not.

This post will cover income protection insurance and whether you should consider investing in it. 

What is income protection insurance?

Generally speaking income protection insurance is a benefit paid on a monthly basis which pays you a certain percentage of your income (generally 75%) of your income and covers you for accidents, illnesses and major traumas. 

Unlike TPD insurance it does not require that you not be able to work ever again but rather pays you for the time that you are off work until you return to work.  It normally comes with a waiting period.  If you cannot return to work it pays you until retirement age (in Australia this is 65).  It is designed as an 'interim insurance' rather than a final type of payout that TPD and life insurance payouts tend to be.

Should I get income protection insurance?

Income protection insurance is often provided by employers (especially multinationals) and Australia this is normally done through your superannuation package.  It is normally bundled with Life and or TPD insurance to provide 'all situations' type cover.

In the event that it is not automatically provided for you there are several things that you need to consider before getting income protection insurance:

1. If I don't work for a period of time, can I still pay the mortgage, put food on the table and meet all the other necessary expenditures?
2. How long would any savings I have last?
3. How old am I and how long is it likely to cover me for?

If you have sufficient savings set aside you probably do not need income protection insurance but you should always ask the second question because you need to consider not only if you could last a few months without your income but if you could last a few years (in case you get really sick but not an event that TPD covers).

This is a type of insurance which is also age dependent.  Because it only lasts until your retirement age (65), it probably isn't worth getting if you are in your 60s...at this point you are probably pretty close to being set up and if you get really ill it is not going to cover you for very long.

Obviously it is dependent for every person but if you are young and not yet set up it is probably something that you should really consider getting.

What are the the things I should watch out for in the policy?

The biggest things to watch out for (other than the cost obviously) are:

1. The waiting period between when you actually claim and when you start getting paid.  Sometimes this is several months and you need to make sure you understand exactly when and what you need to get paid.
2. Any specific exclusions.  Exclusions are often the most overlooked part of insurance contracts but you want a policy that excludes as little as possible.  Note that a common exclusion is pregnancy so even if it is unplanned you cannot claim income protection insurance in the event that you are pregnant.
3. How long the payments last for.  Normally the payments last until you go back to work but often there is a finite payment period (e.g. 2 years) and you need to watch out for this.
4. What wage it covers:  If a significant part of your wage is in commission or overtime you need to see what wage actually is actually covered - sometimes it could only be the much lower base part of your wage.
5. What caps there are on wage:  Often there are caps on the wages that are covered or it will require you to do special tests / medicals if you want a higher coverage level.