Special to the Financial Independence Hub
If you became seriously sick or injured today, would you be able to afford all your bills? Think about not only your medical expenses, but also your monthly payments: utilities, mortgage, car, insurance, loan repayment, etc.
Health insurance might pay for your hospital bills, but if you’re unable to work for an extended period of time, would you feel the pain of lost income?
Most of us certainly would. Fortunately, income protection insurance is designed to help us carry on without too much disruption.
What Is Income Protection Insurance?
In exchange for a monthly premium, you get peace of mind through income protection insurance. If you were unable to work due to an injury or illness, income protection insurance essentially replaces your income.
Specific details will depend on each policy, but in general you can expect to claim your income protection insurance more than once. That means you can benefit from the payouts any time you get sick or injured, and not just the first time you experience a major setback.
With so many types of insurance policies on the market, it’s easy to nickel-and-dime yourself. Is income protection insurance something you should have, or should you put the money you would spend on monthly premiums into a savings account?
Preparing for the unexpected
First, let’s look at all of the options on the table. If you are unable to work, income protection insurance isn’t the only way to weather the storm. Other ways to prepare for serious illness or injury include:
- Applying for government benefits
- Keeping a robust savings account ready for such an emergency
- Working for a company that provides sick pay
- Retiring early, if your injury or illness happens close to your retirement age
- Relying on your family to support you
Which method of preparing for the unexpected is best for you?
Should you get Income Protection Insurance?
Income protection insurance is an extremely smart way to hedge against income lost from a severe illness or injury. Even if you have a sizeable savings account at the ready, you can keep those funds intact for your future retirement by using income protection insurance to get you through a rough patch.
As with all types of insurance, the monthly premium ends up costing much less overall than the amount of money paid out by the insurance company. Think about how much money you make each week. The monthly premium for income protection insurance is a mere fraction of that income, and yet the insurance company would be replacing your lost income.
Income protection insurance is especially useful for people who have children or other dependents who rely on their income, or who are self-employed and therefore have no company benefits such as sick pay to fall back on.
Types of Income Protection Insurance
There is no one-size-fits-all insurance policy. There are multiple types of income protection insurance to choose from, including short-term and long-term policies. Short-term policies typically pay out for a limited time, such as six months to a year. Long-term policies pay out for a much longer time.
Other forms of income protection insurance give you payouts equal to certain bills, allowing you to make worry-free payments during your time of ill health. Mortgage payment protection, unemployment protection, loan protection and payment protection are all examples of income protection insurance.
Also note that the difference between income protection insurance and critical illness protection is that payouts occur over a period of time with income protection, whereas critical illness protection gives a one-time lump sum payout. For example, with NRMA Income Protection policies, you can choose to add additional coverage that will give a lump sum payout: kids’ injury coverage and permanent disability coverage. Your insurance provider may have other optional policies available.
A smart bet
In short, income protection insurance is a smart way for any working person to avoid some of the disruptions that go hand-in-hand with severe illness, serious injury and lost income. If you wonder whether you can afford income protection insurance, chances are you can’t afford not to have it. Seek a free consultation with your insurance company to see if income protection insurance is right for you.