One of the main aspects of an Income Protection insurance policy is that it must provide you with a continual monthly benefit payment in the event of you not being able to work for an extended period of time as a result of injury or illness.
In most cases, the continual monthly payment benefit will be an amount of up to 75% of your current gross income. However, some insurers will pay out up to 85% – 75% of this will be paid directly to you, with the other 10% being paid into your superannuation account as a superannuation benefit. Depending on how much you currently earn, your continual monthly benefit amount could be capped to an upper limit – this usually applies ot high income earners though. The continual monthly benefit amount will be calculated from the amount you were earning before you became ill or disabled.
The way in which your pre-disability salary is assessed will depend entirely on the type of Income Protection insurance policy benefit that has been entered into with your chosen insurance company at the time your cover was established.
There are two different types of benefits, namely agreed value and indemnity.
- Agreed Value
An agreed value type of benefit will involve the continual monthly benefit being assessed and agreed upon at the beginning of the policy and not at the time when a claim is lodged. You will also be required to provide solid proof of your current gross income at the time you apply for your Income Protection insurance policy. This documentation will be used to determine what the amount of your continual monthly benefit payment is going to be.
This continual monthly benefit payment amount is agreed upon and determined when you first sign up for your Income Protection insurance policy, meaning that you will obtain this amount regardless of whether your experience an increase or decrease in your monthly income or not before you lodge a claim.
When signing up for an agreed value type of benefit, it will normally provide you with a level of certainty with regards to how much money you will receive each month in the event of a claim needing to be submitted. This is often the most recommended route to take if you are expecting any form of fluctuation or change to occur with regards to your level of earned income at any time. However, it’s important to remember that you will more than likely pay higher monthly premiums when signing up for this type of policy.
- Indemnity Value
When setting up one of these types of insurance policies, you will need to state what your current gross income is. The amount that is quoted for your continual monthly benefit on your Income Protection insurance policy will then be based on the gross income you are currently earning.
If you should never need to submit a claim, you will have to provide proof of your gross income to your insurance company. The insurer will then assess your level of pre-disability income by using this to determine if you qualify for the continual monthly benefit payment option on your Income Protection policy.
If the amount of your continual monthly benefit payment is less than the initially quoted continual monthly benefit payment on your policy, you will unfortunately receive the lower amount. This can sometimes happen if your gross income has decreased or increased over time, from the date that you set up your policy and before you submitted a claim.
In most instances, an indemnity value benefit option might be better for you if you are not expecting there to be any fluctuations in your gross income over time. In addition, you can look forward to paying lower premiums for this type of benefit than those quoted for agreed value policies.
Structure of Ownership
When dealing with any type of insurance policy, it’s crucial to consider whom or which entity should be holding and funding it. In most cases, the premiums that are paid for these types of policies are tax deductible.
It is also possible to have an Insurance Protection policy within your superannuation. However, there can sometimes be legislative restrictions that come with doing this. As a result, it is essential to ensure that you are aware of any legislative implications that could apply when you are working with your superannuation fund. This is just one reason why you should always obtain professional advice before signing any policy-related paperwork.
What all of this could mean for you
The decision to set up any type of Income Protection insurance policy with an agreed value or indemnity benefit will depend entirely on your personal financial situation and how you would prefer to have your family covered in the event of becoming ill or disabled.
Owing to the fact that no two Income Protection insurance policies will ever be the same or offer exactly the same benefits, you must ensure that you read your Product Disclosure Statement thoroughly before signing any paperwork. If you are unsure of the meaning of any clauses contained in it, it is strongly recommended that you obtain professional advice.
If you are keen to start an Income Protection policy, but are not sure how they work or which option will be best for you, get in contact with us today. We look forward to working with you.