Introduction
Unexpected illness or injury might stop you from working, and this could really put a dent in your budget. Income protection insurance steps in as a lifeline when this happens, sending regular payments your way to help keep your finances afloat so you can concentrate on getting better.
For Australians considering this type of insurance, navigating the application process effectively is key to securing appropriate income protection cover. This guide provides essential information to help you understand the steps involved in applying for income protection policies, ensuring you are well-prepared to provide the necessary details to your chosen insurer.
Understanding Key Policy Features Before You Apply
Defining Benefit Periods
The benefit period is a crucial feature of income protection insurance policies. It represents the maximum length of time you can receive monthly benefit payments if you make a successful income protection claim because you are unable to work due to illness or injury. This period begins after your waiting period has ended.
When selecting income protection cover, you will typically choose a benefit period. Common options offered by insurers include:
- Set durations, such as two or five years.
- Periods extending up to a specific age, often 65 or sometimes 70.
Choosing a longer benefit period generally results in higher insurance premiums, but it offers greater protection if you face a long-term inability to earn an income. Conversely, a shorter benefit period usually means lower premiums. Understanding the benefit period helps you select a level of cover appropriate for your financial situation.
Understanding Waiting Periods
The waiting period is the specific amount of time you must wait after you become unable to work due to illness or injury before your income protection benefit payments can commence. You will not receive payments during this waiting period, so it’s important to plan how you will manage financially during this time. Insurers offer various waiting period options, commonly ranging from 14 days up to two years.
Several factors influence the choice of a waiting period:
- Cost: Policies with longer waiting periods typically have lower insurance premiums.
- Financial Resources: Consider your available sick leave, annual leave, savings, or emergency funds that could cover your expenses during the waiting period.
- Other Support: Check if other support, like salary continuance through your employer, might be available.
You must still be unable to work due to your sickness or injury at the end of the chosen waiting period to be eligible to receive monthly payments. Carefully selecting a waiting period that aligns with your financial situation is essential when applying for income protection cover.
Indemnity vs. Agreed Value Policies
Income protection policies historically came in two main types concerning how the benefit amount is determined: indemnity value and agreed value. Understanding the difference is important, although options for new policies have changed.
- Indemnity Value Policies: Your monthly benefit is calculated based on a percentage of your income at the time you make a claim. If your income has decreased since you took out the policy, your benefit payment will be lower. For variable incomes, the insurer typically averages your earnings over a relevant period. These policies are generally cheaper.
- Agreed Value Policies: Your monthly benefit is based on a percentage of your income that was agreed upon when you first applied for the policy. These were often more expensive but provided certainty for those with fluctuating incomes.
It is important to note that since 31 March 2020, insurers in Australia can no longer offer new agreed value income protection policies. If you purchased an agreed value policy before this date, you can usually keep it, but any new policy taken out will be an indemnity value policy.
Stepped vs. Level Premiums
When considering income protection insurance, you will encounter two main ways premiums are structured over time: variable age-stepped premiums and variable (level) premiums. Your choice affects the cost of your insurance premiums both initially and in the long term.
- Variable Age-Stepped Premiums (formerly ‘Stepped’): These premiums are recalculated each year at your policy renewal, based largely on your age. They typically start cheaper but increase each year as you get older, reflecting the higher likelihood of making a claim.
- Variable Premiums (formerly ‘Level’): These premiums usually start higher than stepped premiums. However, future increases are less directly tied to your age, meaning the cost generally rises more slowly over the life of the policy.
Understanding these structures helps you anticipate future costs and choose the premium type that best suits your long-term financial planning when applying for income protection insurance.
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How to Apply for Income Protection Cover
Application Channels: Where to Apply
Australians have several options when deciding where to apply for income protection cover. Understanding these channels can help you choose the path that best suits your needs. Common methods for applying include:
- Directly with an insurance company: You can approach an insurer directly to apply for a policy.
- Through your superannuation fund: Many super funds offer default income protection insurance, and you may be able to apply for or increase your cover through your fund. This option can sometimes be cheaper than buying directly.
- Via a financial adviser: A financial adviser can help assess your needs, compare policies, and guide you through the application process.
- Using an insurance broker: Brokers can compare policies from different insurers and assist with the application. Services like Compare the Market facilitate applications, often over the phone, simplifying the process.
The Application Assessment Process
Applying for income protection insurance involves an assessment process known as underwriting. Since income protection insurance in Australia is risk-rated, the insurer evaluates the likelihood of you making a claim in the future. This assessment serves two main purposes:
- Determining Eligibility: It helps the insurer decide whether you qualify for coverage.
- Calculating Premiums: Based on the risk assessment, the insurer calculates the premiums you will need to pay.
The insurer bases this risk assessment on the information you provide during the application. Whether you’re using a broker or applying directly, the process typically involves answering questions about various aspects of your life that are relevant to the risk being insured. Once you’ve provided the necessary information, your application is formally lodged with the insurer for their review and underwriting decision.
Information Required for Your Application
Personal and Lifestyle Details
When applying for income protection insurance, insurers require specific personal details to assess your application. This information helps them understand your individual circumstances and potential risk factors.
You will typically need to provide the following personal and lifestyle information:
- Date of birth: Your age is a key factor in determining premiums.
- Gender: Insurers may use gender as a factor in risk assessment.
- Residency status: Your residency status in Australia is usually required.
- Smoker status: Whether you smoke impacts your risk profile and premiums.
- Hobbies and pastimes: Details about high-risk sports or hobbies, like skydiving, may be requested as they can increase the likelihood of injury.
Occupation and Income Information
Your employment details are fundamental to an income protection application. This information allows the insurer to understand the risks associated with your job and calculate the appropriate level of cover.
Key details you will need to share include:
- Occupation: Provide your specific job title and describe the duties involved.
- Gross annual income: This includes your salary, wages, and any commissions, forming the basis for calculating your potential monthly benefit.
Medical History Disclosure
Providing a complete and honest account of your medical history is essential during the application process. Insurers need this information to accurately assess the risk of you needing to make a claim in the future.
You will likely be asked questions about:
- Personal medical history: This includes past illnesses, injuries, and treatments.
- Family’s medical history: Some conditions can be hereditary, so details about your family’s health are important.
It is crucial to answer all medical questions truthfully and completely. Failing to disclose relevant information, particularly about pre-existing conditions, could lead an insurer to decline a future claim or even cancel your insurance cover.
Factors Affecting Your Application Outcome
The details you provide when applying for income protection insurance are crucial. Insurers use this information to assess the risk associated with your application. This assessment, known as underwriting, directly influences whether your application is accepted and the specific terms and conditions of the insurance cover offered.
To determine the likelihood of you needing to make a claim in the future, the insurer evaluates several factors, including:
- Your age
- Your occupation
- Your income
- Your medical history
- Your lifestyle
Based on this risk assessment, several outcomes are possible for your income protection application. The insurer will decide based on the information you disclosed regarding their requirements. Potential outcomes include:
- Acceptance at standard rates: Your application is approved with standard terms and premiums.
- Acceptance with an exclusion: Your application is approved, but specific conditions or situations (often related to pre-existing medical conditions disclosed during the application) are excluded from the cover.
- Acceptance with a premium loading: Your application is approved, but the insurance premiums you pay will be higher than standard rates due to increased risk factors identified during the assessment.
- Decline: The insurer decides not to offer you income protection cover based on their assessment of the risk.
Conclusion
Applying for income protection insurance means understanding key features like benefit and waiting periods, premium structures, and the difference between indemnity and agreed value policies. The process involves providing personal, occupational, and medical information for the insurer’s risk assessment, which determines your terms and premiums.
Navigating this can be complex, but expert advice makes it simple. Contact Money Path today to work with our Adelaide financial advisers and secure income protection tailored to your needs.
