What is income protection insurance?

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If you are exploring different ways to prepare for the unexpected, you may have thought about income protection insurance. In short, income protection insurance protects you when you are unable to work due an illness or injury by providing you with a replacement income. 

Income Protection Insurance Explained

With income protection insurance, your insurer will provide you with regular cash payments that function to replace the income that you lose due to a medium to long-term illness, injury, or disability. In general, to qualify for income protection insurance, an individual must be a full-time, paid employee or be self-employed.

Income protection insurance can be beneficial to a wide range of people working in a variety of industries and careers. However, income protection may be more advantageous for those who are self-employed, those with little to no sick pay, those who have no ill-health pension protection, those with dependents, and those with no other source of income. 

Cost of Income Protection

The cost of income protection insurance is largely dependent on the level of coverage, the chosen deferred period, and the policy term. However, other factors like age and health will also affect the cost of the coverage. 

Your job will also impact the cost of your premium because different jobs have different degrees of risk associated with them. Therefore, different jobs are categorized into different classes with the lowest risk jobs being considered under Class 1 and the highest risk jobs being a part of Class 5. People in Class 1 generally pay the lowest premium, while those in Class 5 are either denied coverage or pay the highest premium.

You will receive your benefit, or payment, only if you can no longer work in your current job and are not working at any other job for the deferred period. Deferred periods are usually 4, 13, 26, or 52 weeks depending on the policy. The deferred period length also impacts the overall cost of your income protection policy with a deferred period of 4 weeks being the most expensive. It is also important to note that some policies have no deferred period.

Coverage Specifics

When taking out an income protection policy, you can either choose an individual policy or choose to join a group scheme at your company. Generally, group schemes cost less money and require less medical information than individual policies.

Benefit payments will end when you return to work, reach the benefit cessation age, are fit to return to work as determined by the insurer’s medical officer, or pass away.

Income protection insurance can protect you when the unexpected happens. Understanding the specifics of what a policy will look like for you will help you determine whether to take out an income protection policy.