Earlier this week I wrote about Funeral Insurance at AllThingsFinance.net. I’d never thought of nor considered buying burial insurance on myself (or a friend or loved one) to help out if something goes wrong. The company I was reading about on the subject (Lifebroker) also had information on something called “Income Protection Insurance.”
I’ve heard of Income Protection Insurance, but have never purchased it or pursued getting more information on it. Lifebroker is an Australian company, so the extent of what income protection can do is actually a bit broader there (and in the UK) than it is here. Even still, it was pretty interesting learning about what Income Protection Insurance can do.
What Is Income Protection Insurance?
Simply put, Income Protection Insurance is taking matters into your own hands if something bad happens and you can’t work. Many insurance companies that offer this in the States will guarantee up to 75% of your current salary for several months, depending on the monthly premium you are willing to pay.
Why Would I Need That?
I think we assume Disability, Unemployment, or employer and government programs will cover our tails should we get injured, sick, or have a psychological meltdown.
Of course, if you are hurt while on the job, your employer should pay for your injury, and your salary while you are recovering. But can you force them? Yeah…with the help of a lawyer and potentially years of litigation. Who’s going to pay your bills if they don’t agree to cover your medical expenses and salary immediately?
This is where Income Protection Insurance comes in handy. Whether it was an injury on the job, or you got sick just because you got sick, having income protection can help you make ends meet for several months if you are out of commission. Especially if your employer isn’t liable for you being ill.
How Does It Differ Between Insurance Companies?
If you are in the market for Income Protection Insurance, know that different insurers will define Income Protection differently in the following areas:
- Definitions of disability and partial disability
- Definitions of income
- Range and length of benefits
How Expensive is Income Protection Insurance?
Income Protection can actually be more expensive than Life Insurance, but the Income Protection premiums are tax-deductible. If you do end up collecting your “salary” from an insurance company, that will be taxed as it will be considered your actual income.
There’s a wide range of factors that determine the cost of Income Protection premiums. Such as:
- Age
- Gender: Women often have to pay more for Income Protection. I could not verify, but I assume, that is related to possible pregnancies.
- Smoker Status
- Occupation: Manual laborers will pay higher premiums.
- Benefit Period: How long you will collect income.
- Amount of Benefit: The % of your income you want guaranteed.
- Minimum Working Requirements
- Extras: the extra “icing” may increase your premium.
The factors that determine the cost are many, but I found that you would typically expect to pay around 1/10th of a percent of your income per month as your premium assuming you want a good plan and you are considered a “Standard” risk. Of course, if you’re interested you’ll want to get a quote yourself.
Lifebroker’s Income Protection Insurance subpage has some really good details and a small case study that you can look at to understand it better.
Depending on how much the premiums are this might not be something bad to have.
It’s not a bad idea. Like all insurance, you’re kind of “gambling” against your own favor haha. But think of families that have to go through really hard times when unexpected illness comes. This really does guard against that.
I like the idea of calling disability insurance Income Protection insurance. Some companies do offer a 60% of income long term disability plan, but its good to look into what you have at work and potentially supplement it with an individual policy.
That is a good option to opt into if possible, and to get something like this to supplement it will certainly award you a full salary should the worst happen.