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Income protection insurance FAQs


Published 9 October 2018

 

Understanding how income protection insurance works.

See the frequently asked questions about income protection including cover length, waiting periods, exclusions and costs.  

1. What is income protection insurance?

Income protection insurance can replace up to 80 per cent of your regular income if you're unable to work due to illness or injury.

2. Who may need income protection insurance?

Anyone who relies on their income to meet their everyday expenses. Whatever has put you out of work – your illness or injury, and in some cases involuntary unemployment or looking after your seriously ill child – you could be left struggling to pay everyday expenses like your mortgage, rent, groceries or school fees. Income protection insurance can provide regular monthly payments, giving you financial support.

3. How is income protection insurance calculated?

Like other insurance policies, the amount you pay for income  protection cover comes down to how likely you are to make a claim, how long you’re willing to wait before receiving a benefit and how much money the insurer might then have to pay.

The likelihood of you making a claim is determined by such things as your age, gender, occupation, smoking status and how healthy you are. The amount the insurer will potentially have to pay out is determined by how long the cover continues for and how much you earned in the 12-24 months prior to claiming.

 

4. What does income protection cover?

Income protection covers up to 75% of your income if you’re unable to work due to an illness or injury serious enough to stop you working (beyond your specified waiting period).

Some policies also offer additional cover if you’re out of work due to involuntary unemployment or you need to take time off to look after your seriously ill child.

5. What isn’t covered by income protection?

Check your individual policy for exclusions. Some policies are automatically accepted, or accepted with minimal underwriting, and rely on a pre-existing condition clause. This clause means you won’t be able to claim for any cause which relates to a condition you had before the policy started. This may include health conditions such as cancer, diabetes, epilepsy, a heart condition, hepatitis or even sleep apnoea. Other policies are underwritten upfront, meaning you answer health and lifestyle questions in your application and your cover is assessed before it is accepted. You may be charged a higher premium or have an exclusion applied if your history indicates a higher risk. Some may decline to offer cover at all.

Other standard exclusions are illness or injury resulting from:

  • pregnancy
  • a mental disorder or illness
  • self-harm or attempted suicide
  • drug use or criminal activities
  • war
  • training for, or participating in, professional sports or motor racing.

If you’re involved in an occupation or hobby that is judged to be risky (for example, you’re a deep-sea fisherman or hang-gliding enthusiast), you may not be eligible for coverage or may attract a higher premium. You should disclose these to your insurer at the time of applying for the policy.

Premiums for smokers are more expensive than that of non-smokers. Insurers will generally consider you a smoker if you’ve had even one cigarette in the 12 months before your insurance application. However, once you’ve quit smoking for at least 12 months, premiums can revert to the same level as non-smokers.

6. How much will it cost?

Premiums are calculated by a number of factors including age, gender, occupation, smoking status and the amount of cover you select. Generally speaking, you’ll pay less for cover if you’re younger, healthier and not involved in any risky activities. Your gender affects your premium due to differing disability rates between males and females – usually premiums are higher for females.

The cost of your premium can be reduced by lengthening the waiting period (the amount of time you wait before you’re eligible for payment) and reducing the benefit period (the maximum length of time you can receive payments). Furthermore, premiums for an income protection insurance policy paid directly by you, that is, one not taken out through superannuation, may be tax-deductible.

7. How long can I be covered for?

The most common coverage options (benefit periods) are:

  • one year
  • two years
  • five years
  • to age 65. 

8. How long is the waiting period?

The waiting period is the period you must wait before your benefit becomes payable. Benefits are generally paid in arrears, i.e. if your waiting period is 30 days, then your benefits start to accrue from day 31 and you are paid at the end of that month – so you will be paid after 60 days.

The most common waiting periods are 30 days, 60 days or 90 days. You may be able to opt for periods anywhere from two weeks to two years. Generally speaking, the longer the waiting period, the cheaper the premium.

People with savings accrued annual leave or long-service leave are generally best placed to take a longer waiting period. For others, you’ll need to weigh up whether it’s worth saving on the premiums now if it means you won’t get a pay-out for months if you need to claim.

9. What happens if I can’t pay my premiums?

You need to pay your premiums when due to keep your policy in force, except when you’re receiving a benefit. You may be able to pause your premiums for up to 12 months under the following circumstances:

  • you take unpaid leave
  • you become unemployed
  • you go to work overseas
  • you are experiencing financial hardship.

You may also be able to pause your premiums if you’re on maternity or paternity leave. Call your insurer to discuss any changes in your circumstances that affect your ability to pay the premium.

This usually also pauses the cover, so you won’t be covered during this time, but you won’t have to go through the application process again when you resume the cover.

10. What is the difference between a stepped policy and a level policy?

A Stepped premium means your premium is recalculated each year on the date you took out your policy. This means that as you age your premiums will generally increase. Level premiums mean your premium will be calculated based on your age when you first took out, or increasedthe cover. Level premiums generally don’t rise unless the defined premium rates rise. Stepped policies start out with a cheaper premium and rise over time, while Level premiums start out at a higher price but become comparatively cheaper over time.

11. Does the policy pay out if I’m unable to work in my normal occupation?

Insurance policies distinguish between a policyholder’s own occupation and any occupation they could potentially pursue based on their education training and experience.

Check your policy for details – some income protection policies pay out if a policyholder is unable to continue with their own occupation, while others only pay out if they are unable to work in any occupation. And some pay out for a capped period if a policyholder is unable to pursue their own occupation during that time, but only continue to do so if they are then unable to work in any occupation.

12. Can I make changes after I have taken out the policy?

Generally policies are flexible, but if you are increasing the risk, i.e. taking out more cover, or reducing a waiting period for example, this may need to be assessed. Contact your insurer about what options are available to you.

13. What if I get a pay rise or pay cut?

You can increase or decrease the amount of cover at any time if your earnings go up or drop. To be eligible to increase the amount of your income cover, generally you must confirm:

  • your occupation, employment status and number of hours worked each week
  • your new income
  • your health status by answering a few questions. 

Note: if you reduce your amount of cover, benefit period or increase your waiting period, you may not be able to reverse these at a later date.

Find out more about ANZ Income Protection

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