Income protection insurance is a policy that pays benefits to policyholders who are unable to work as the result of an illness or injury. There are, however, multiple kinds of income protection policies, so it helps to familiarize yourself with them so you can decide which ones are right for your situation.
How Income Protection Insurance Works
An income protection policy offers three levels of coverage:
- Own income protection kicks in when an illness or injury leaves you incapable of performing the tasks required by your own occupation
- Suited income protection applies when you are not only unable to do your own job, but also cannot do a job that you could normally take on given your experience and qualifications (in other words, a job that you are suited for)
- Any occupation income protection covers you when you are incapable of doing any type of work, even outside your field.
Most policies limit the payable benefit to approximately 70 percent of your gross income (although it can be lower for higher income earners). Moreover, any benefit or compensation received from the state can reduce the maximum benefit you are eligible to receive from you insurer.
Some insurance companies will encourage policyholders to resume work upon recovery by offering reduced benefits for taking up a part-time or lower-paying job, rather than ending the benefit payments. This is commonly known as a proportionate benefit.
Specific income protection insurance policies may have distinct sets of criteria, but in every case you will not qualify for the benefits if you are unable to work for any reason other than illness or injury. You are also ineligible for compensation if the incapacity arose as a result of intoxication from drugs or alcohol, criminal acts, war, or pregnancy.
Advantages of Income Protection Insurance
The primary benefit of income protection insurance is, of course, the benefits that are paid in the event of the policyholder's incapacity to work, after the deferred period has passed. But, in some cases, the benefits also have the the added advantage of continuing until the policyholder's death, recovery, retirement, or the end of the term of the contract.
Finally, most policies include a waiver of premium that allows coverage to continue even when you cannot pay, as long as you meet certain conditions.
5 Types of Income Protection Insurance
- Disability insurance. This policy insures your income against the risk of a disability that renders you unable to work. It consists of various benefits, such as paid sick leave and short- and long-term disability benefits (see Why You Need Disability Insurance to learn more).
- Long-term disability insurance. This specific type pays out only once your short-term policy and other employment benefits end and continues for a stipulated period of time.
- Disability overhead insurance. It is also known as business overhead expense because it pays for those expenses in case you become disabled. The monthly amount is based on actual expenses incurred, not estimated and anticipated profits. It is intended to cover rent, utilities, equipment maintenance, postage and stationery, and taxes on the business property, among other costs.
- Total permanent disability insurance. You can insure yourself against the risk of a permanent disability through a disability policy, workers' compensation, or as a part of a life insurance policy. A permanent disability is one that an individual cannot recover from, including the loss of both eyes, arms, or legs, as well as absenteeism from work due to an illness or injury that renders the individual unable to ever resume employment.
- Workers' compensation. This type of insurance provides partial income compensation and covers medical expenses in case you become injured while working. In exchange, you must give up your right to sue your employer for negligence (for an overview, see An Intro to Workers' Compensation).
Income protection insurance encompasses a variety of policies meant to protect you financially in the event of a serious injury or illness. It is an especially worthwhile investment for those who work in high-risk occupations.
Ultimately, the decision depends on your means, situation, and specific needs. For some, it may be a waste; for others, a lifesaver. But in either case, it will provide peace of mind.