Nobody likes to imagine the worst – a situation where you become ill or injured and are no longer able to work. If you’re self-employed your income will be almost entirely dependent on your ability to turn up at work each day. If something happens that makes this no longer possible you have a problem.
So, what is Income Protection Insurance?
This is where income protection can be your savior. Income Protection Insurance is a form of insurance that can replace your income in the event of an accident or illness incapacitating you for an extended period. For many business owner’s the concept of insuring is often applied to equipment or assets. A large percentage of small business owners in Australia fail to adequately cover themselves for the rarer events that can have even more disastrous consequences.
How does it work?
Income Protection Insurance policies are offered by most insurance providers with each offering different premiums, terms and conditions depending on the policy selected. Some common expectations for policies include:
A deferment period. Most policies will not pay out immediately upon the accident or injury happening. It is standard to have a period without receiving payment to avoid short term situations where the injured party may recover quickly. The length of this period will depend on your policy. Generally, the longer the period of deferment for receiving payments the lower the premium will be.
Conditions of Claiming. Policies will be clear in their requirements for paying out. Conditions outside of accident or injury will generally not be covered, nor will pre-existing conditions in place at the time the policy is established. Deliberately self-inflicted injuries or accidents caused while under the influence of drugs or alcohol will also not be covered.
Premiums. Policies may consist of regular monthly or annual lump sum amounts. These may be tax deductible depending on the taxability of any payouts. Failure to maintain premiums may render the policy ineffective. You may be required to continue paying premiums even after a claim is made and is being paid out.
Payouts. Most claim thresholds will represent a percentage of the income level of the recipient – 75% being a common level of payment. The maximum amount to be paid out may be capped to prevent a situation where the beneficiary could earn more than their income level prior to the claim. You will need to check on the specifics of the policy regarding whether payouts received are taxable or tax free, and this will affect the ability to claim the premium as a tax deduction. Payouts will normally have a finite payment period, expiring after that period has elapsed. Again, shortening the period for receiving payments in the event of a claim can reduce the amount of the premiums.
A recent study by the Insurance Council of Australia discovered that only 43% of businesses had adequate trauma/disability and income protection cover in the event of an unexpected accident. Not being adequately covered can have far reaching consequences for your business and your lifestyle.
If necessary, you should consider getting professional advice. This will help you understand your options. Fear often comes from not understanding and simply having a good Advisor explain your situation will go a long way towards improving how you feel and what you can do.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.