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If you become sick or injured and have to take an extended period of time off work, it could spell financial ruin. Taking a substantial amount of time off work for this reason usually means there will be associated medical bills, as well as the normal rent, bills and grocery shopping costs. For many people this would be impossible without a regular income.
This is where income protection insurance comes in handy. The purpose of income protection insurance is to cover your wage if you become sick or injured and are unable to work.
Income protection payouts and premiums
Most income insurers will allow you to insure up to 75 percent of your total net income. For example, if you earn $400 (net) a week you could apply for a payout of up to $300 a week. It is not really worth insuring less than 50 percent of your total wage, so if you earn $400 a week, you wouldn't insure it for less than $200.
Premiums will be determined by marital status, age, gender, smoking status (smokers will pay more than non smokers), risks associated with your job (builders will attract a higher premium than an office worker), general health and any pre-existing medical conditions.
It is standard practice for annual income protection premiums to cost around the same as one week of wages. If your insurer is demanding substantially more than this it is recommended that you seek further advice from the Insurance Ombudsman.
The right amount of income protection coverage
The level of coverage you sign up for depends on your living situation. If you are single and have no dependents, you may decide 50 percent of your wage is enough to get by on. On the other hand, if you have a mortgage and/or dependents that also rely on your wage, you should probably look into maximum cover.
Some super funds offer short term income protection to eligible applicants, which is worth looking into as an extra.