What does income protection cover?

None of us like to think we will get sick or experience a devastating injury that takes us out of the workforce for an extended period but it can happen. When it does, if you are not insured the impacts can be severe and lasting – not only on your person but also your financial wellbeing. For this reason many people with a heavy burden of debt and pressing family commitments or other obligations take out income protection insurance. But what is it and what does it cover?

What is income protection?

An income protection policy is an agreement between you and the insurer to pay you at a previously agreed rate – to a set limit – under set circumstances. For example, you may be paid 75 percent of your income after a six-week waiting period should you be totally disabled in event of an accident.

Income protection policies tend to be grouped into one of three categories – white collar worker, blue collar worker, and sole trader/business owner – as each group tends to have different risk profiles for the insurance companies.

What will it cover?

All policies differ, but you may also be covered for rehabilitation costs, nursing care, a spouse’s income if they must leave work to look after you or even a house-keeper. You could also receive benefits for emergency transport, ambulance costs and even your death, depending on the level of cover you take out and how long you have been insured for prior to the event. Business people for example, may be insured against the fixed business costs necessary to maintain the business while incapacitated, such as rent, power and so forth.

A recent trend has been towards “trauma insurance” which covers you in the event of a trauma. The main way this differs from income protection insurance, which is usually paid in monthly instalments, in that trauma insurance is paid in a lump sum soon after the incident.

Read the fine print

Although taking out any kind of income protection policy may give you peace of mind be sure to read the policy from cover to cover before you sign it. They are complex documents and it is not uncommon for people (or their loved ones) to get a nasty surprise when the time comes to make a claim.