Guide to income insurance

Income insurance is designed to protect you and your family in the event that you become unable to work due to illness or injury.

Protecting your income becomes particularly important if you have ongoing bills or debts such as a mortgage or if you have a spouse or children who are dependent on you financially.

Choosing income insurance can be tricky and there are a lot of considerations that need to be taken into account.  Generally speaking, when choosing an income insurance policy, there are three decisions you will need to make;

  • how long you would like the payments to last if you do become unable to work;
  • how long you would be willing to wait before the payments kick in; and
  • what proportion of your current income you would like the payments to represent

Variations on these three factors can make a significant difference to your premiums but also to your quality of life.

There are two different types of income insurance; indemnity and agreed value.  Indemnity insurance is based on your income at the time that you become unable to work.  This type of policy is typically provided by your superannuation fund with the premiums simply being deducted from your account.

If you are provided with indemnity income insurance, it is worth investigating the specifics of your policy to confirm that you have a level of cover that suits your needs.

Agreed value policies will cover you for the income you were earning at the time that the policy was taken out, regardless of any fluctuations.  Whilst these policies are generally more expensive that indemnity contracts, this can be a worthwhile investment for high income earners and business owners where variance in income levels is experienced.

There are two more things that you should look at when assessing your income insurance options.  The first is guaranteed future insurability, meaning that you can increase your level of cover if you want to (this might be particularly important if your circumstances are likely to change).

The second is whether or not the policy is non-cancellable which will mean that the premiums cannot be redefined based on any health problems.