Frequently Asked Questions About Income Security Insurance

Learn essential facts about income protection insurance, including coverage options, waiting periods, claim features, and funding methods. Protect your income against illness or injury effectively with tailored options that suit your financial needs and career situation, ensuring peace of mind during unforeseen circumstances.

What is income security insurance?

For most individuals, their working years span about 40 to 50 years. The most valuable asset they need to safeguard is their earning capacity. Income security insurance provides a safety net by replacing your income if illness or injury prevent you from working. Typically, it covers up to 75% of your pre-disability earnings, with a maximum benefit of $30,000 per month if necessary.

If your family relies on your salary for daily expenses, considering income protection insurance is advisable.

How much of my income should I insure?

Insurance providers typically include earned income from employment but exclude passive income, such as investments. The amount to insure depends on your ongoing financial needs and the cost of coverage. For example, earning $300,000 annually doesn't mean you need coverage for the full amount. It's wise to consider your current expenses like mortgage and living costs. If you have additional passive income, incorporate that into your calculations.

Coverage Duration

The insurance period refers to how long the insurer provides benefits. Commonly, coverage extends until age 65, which is typical retirement age in many countries, but it can range up to 70 years. Factors influencing this include your profession, health history, and employment structure.

Waiting Period

The waiting period is the time you must endure before receiving benefits. Longer waiting times often reduce premium costs, as insurers are less likely to pay short-term claims. Options range from 14 to 270 days. When liquid cash flow isn’t a concern, longer waits are suitable, but if immediate income is necessary, shorter periods are preferable.

Claims Enhancement

Some policies include a feature called "claims escalation," which adjusts benefit amounts based on the Consumer Price Index (CPI). For claims exceeding 12 months, the payout increases accordingly. For example, a $10,000 annual benefit will adjust over time to maintain its value. Additional coverage options often allow you to purchase this feature for enhanced protection.

Having adequate coverage up to age 65 in case of lasting disability is typically recommended.

Can I fund income protection through superannuation?

Yes, but it can be complex. Premiums paid through superannuation are generally tax-deductible, making this an attractive option. Claims from super policies are paid directly to the fund, simplifying the process. You can also hold a separate policy personally. If making a claim from the super fund, the trustee must verify eligibility, otherwise, you can claim through a personal policy. You can choose the most suitable method but cannot claim both simultaneously.