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The world of insurance isn’t necessarily fun for us consumers. Effectively, we’re insuring against our own bad luck. Your car might get stolen. Your house might burn down. You could lose your job. You might get sick. While the younger amongst us may feel like these things simply won’t happen to them, the thing that catches us out is that there is rarely a moment when we realise just how fallible we are, and by the time those unfortunate things happen, we kick ourselves that we only thought about insuring against that bad luck, but didn’t actually go through with it.

With all the choices of insurance, the monthly premiums can add up and up, meaning it can become difficult to decide what insurance is worthwhile and what can be scaled back. However, without secure income, it doesn’t matter which insurance policies you have – you can’t pay for them, which is why income protection insurance is one of the smartest insurance investments you can make.

Just like all other insurance products, Income protection is an ongoing expense, and it is difficult to decide what policy is right for you, and what is a reasonable policy for your circumstances. In this article, we will discuss some things you should look at in order to choose the best income protection insurance among those offered by various reputable life insurance companies in Australia, such as

First, let’s define what income protection insurance is. It might sound simple, but not all income protection insurance does the same thing. For the most part, income protection insurance will provide you with a certain percentage of your regular income if you were unable to work due to injury or sickness for long periods of time. That percentage payout is dependent on how much you are willing to pay to the insurance company each month.

Some policies go one step further and will also cover involuntary redundancy, but for the purposes of this article, we’ll be focusing on how to choose an income protection plan for sickness or injury.

What do you want to be covered for?

It’s worth noting that injury & sickness are different things. An injury is considered to be an accident that impairs your ability to do your job by affecting your physical movement. A sickness can be a disease or illness that may not necessarily stop you from being able to move, but may still inhibit your ability to function, such as cancer.

Deciding which of these you want to include in your policy will impact the monthly payments required to keep your policy active, but it’s quite normal for policies to cover both injury & illness.

What do you do for a living?

This sounds obvious, but your career choice can have a profound impact on the likelihood of injury or illness. For example, blue-collar work such as construction, logistics, and trades come with a significantly increased risk of physical injury due to proximity to power tools, heavy equipment, and working in unusual, hard-to-access spaces. As such, someone working in those professions may value income protection from injury more important than illness.

On the other hand, white-collared office workers are unlikely to meet with freak power-tool related accidents, but their proximity to other people for long periods of the day make them much more susceptible to illness. As such, they may value income protection from illness over injury.

However, always consider that sustaining an injury or developing an illness is not something that is restricted to the workplace. Office workers can still be in accidents that cause physical disability, although they are less likely to be prevented from doing an administrative job. Blue-collar workers, alternatively, can still pick up illnesses, something COVID-19 forcefully demonstrated in recent times.

For this reason, you really should consider insurance against both illness and injury when looking for income protection insurance in Australia.

What is Your Benefit Ratio?

The benefit ratio is much of your regular income an income protection plan will cover. It is often presented as a percentage. For example, a benefit ratio of 70%, or 70/30, means an insurance provider will cover $70 for every $100 you lose through not being able to work. A 50/50 or 50% benefit ratio means that the company will cover $50 for every $100 you lose.

The higher the benefit ratio, the more expensive premiums become, while the lower the ratio, the more affordable premiums are but the less you get. If you’re the sole breadwinner or you have a bounty of expenses, a higher benefit ratio will cost more, but you’ll need the support if the time comes.

How Much Are You Willing to Pay?

As with any major or ongoing expense, before committing to anything you need to work out your budgets. This will determine not only what you can afford to pay, but also what premium/ benefit ratio you need.

The best way to determine what you need, and following on from that, what you can afford, is to differentiate your expenses into needs and wants. Needs are your necessities such as rent/mortgage payments, utilities, food & supplies, whereas your wants are more your luxuries such as streaming services, food delivery, dining out and purchasing items such as clothing.

It’s also worth considering what you won’t need if you are off work. For example, if you are off work, your travel and commuting expenses will drop right down, so you may wish to discount expenses such as train fares or car insurance in order to keep premiums at a minimum.

What is Your Waiting Period?

A waiting period is the amount of time that passes from you first being unable to work until your premium kicks in to support you. When making a decision on what waiting period you want, you should also consider how much sick leave, annual leave & long service leave you may have.  Choosing a longer waiting period can bring cheaper premiums, but if you don’t have savings or any leave built up, a long waiting period won’t work for you. Normally, benefits aren’t paid during the waiting period, either, so make sure you choose wisely.

Benefit Period

This one is tricky to evaluate, because you’ll be trying to predict the future, but you can make some assumptions based on the type of cover you need. Returning to your career type, physical injuries can take a lot longer to recover from than an illness, so you may wish to choose a benefit period of between 1-2 years. Longer benefit periods increase your premium, but cover you for longer.

A good practice is to consider what you would do if you were permanently unable to return to work, for example, you were in an accident and permanently lost the ability to work. If your job required you to have full physical movement, you would likely have to re-train to continue working in a different profession, so you may want a policy that not only covers your salary, but also education costs.

Be Honest

Being honest with your insurance company is important, but you also need to be honest with yourself. Don’t pretend that you can get by on a shoe-string budget just to keep premiums down. Mental health is important to physical healing, and if you’ve gone so low with your premiums that you can’t afford any enjoyment during your recovery, your recovery period may become longer than your benefit period allows.

You’ll need to consider all of the above before you invest in income protection insurance to make sure you’re paying for something that is right for you. The best outcome is that you’ll never need it, and you’ll forever question if it was a worthwhile investment, but on the chance that you do need it, you’ll find it was one of the best decisions you ever made.

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