Why income protection is a good back-up plan


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There's no better time to tackle the tough stuff than the beginning of the year when you are refreshed and clear-sighted, and that should include much neglected income protection insurance.

Spare a thought for how you and your family would cope if a serious injury or illness prevented you from working. Where would the money come from to cover your expenses?

Super funds automatically provide death and total and permanent disability (TPD) cover but not income protection, so you need to be proactive.

income protection insurance

"You would generally need to opt in and often you will be medically assessed to obtain cover," says Kirby Rappell, the head of research at SuperRatings. He says some funds do provide a small amount of automatic cover.

TPD only covers you if you are unable to work ever again.

Income protection will provide a steady income to help you recover from, say, cancer or heart problems. It will pay up to 85% (depending on the insurer) of your gross salary for a prescribed period, such as two years.

There is a waiting period of 30, 60 or 90 days before benefits kick in. The longer you are prepared to wait, the lower the premiums.

Premiums are risk based: your age, gender and occupation affect what you pay.

Someone doing a physical, high-risk job will pay more. Premiums come out of super contributions and can be tax effective.

Depending on your fund, you can sometimes get a small amount of default cover without providing medical evidence. But if you need more, your provider may ask you a series of medical questions or require more detail from your doctor.

"It's vitally important you answer these questions honestly as most policies have exclusions that will stop payments of any benefit if the insured person has not fully disclosed any medical conditions or lied on their application," says Rappell.

He says the insurance is complex and people need to read the terms and conditions carefully, paying attention to exclusions.

"A lot of funds will help you to calculate your insurance needs and help make a claim. If you want a meaningful amount of cover, it's best to get it in your 20s and 30s, when you are healthy and it's easier to get approval. Once you have pre-existing illnesses it's harder."

Although you can always get income protection outside super, Rappell says that "most of the time it's pretty beneficial getting it inside super".

You should review your level of cover as your income and financial commitments change.

Take care when switching super funds

If you are moving to a new super fund it may be worthwhile transferring your existing policy, especially if you are older and your health has deteriorated.

But you need to be careful.

"If you've got a level of cover approved at your old fund, you can often bring that across with you providing your policy hasn't lapsed before you move," Rappell says.

"Many funds will allow the transfer of the cover you have. But you can only do that while the other account is still around. If it gets shut down, the policy ends.

"If you move to the fund and you've already closed your account, then usually it is very hard to get that back because you don't have a policy any more. So you need to move to the new fund and then work through the process to transfer it across."

How to make an insurance claim

Making a claim against your policy is undoubtedly a stressful experience for many. Super funds have made an effort to enhance the way they deal with claims to improve the experience. However, members will have to complete a number of forms so it is always best to contact the fund first.

Almost every fund has a claims team and some funds will appoint a dedicated person to deal with you.

They will be the interface between you and the fund's insurance provider. The vast majority of genuine claims are paid out.

There has been a significant rise in lawyer involvement in recent years but this can materially reduce your payout through fees. It is worth talking to your fund first to understand where you are placed.

It is not a good idea to have multiple income protection policies. You need to declare any other income when you make a claim so any payout you receive from one insurer would offset the amount you receive from another.

If you make a claim under a group policy, generally your premiums won't be affected.

However, if you have made a claim, it may affect your ability to obtain cover in the future under a new policy. It is likely to be a question in the pre-screening that requires extra information.how to make a claim

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Vita Palestrant was the editor of the Money section of The Sydney Morning Herald and The Age. She has worked on major metropolitan newspapers here and overseas and has won several prestigious journalism awards including the 2001 Citigroup Award for Excellence in Journalism, Personal Finance Category.