Income protection insurance
Income protection insurance is an element within some life insurance policies which protects a person’s income if they suffer from an accident or disability that makes them unable to work.
There are three levels of income protection insurance. These levels are total disability; disability that prevents the person from working at a similar level, and disability that prevents the person from working at their current occupation. The more complete the coverage, the higher the premium will be.
Total disability income protection is only paid out when, after an accident or disability, the person is utterly incapable of working in any way. While this sort of policy tends to be rather cheap, the disability must be very severe before the insurance company will agree to a payout.
A more common policy element protects the worker at the same level, providing a payout if the person used to earn $50,000 but after an accident or disability can only be accepted for a salary of $30,000. It will have to be proven that the disability or accident caused this drop in income, and that other jobs at a similar level were considered. These policies are more likely to be paid out, and they tend to be more expensive than total disability insurance.
The third common option is income protection insurance for working in the same profession or occupation. The premiums for such a policy are likely to be very high, although payouts tend to be given quite easily. However, these policies are often criticised for not giving much more real protection than the income at a similar level policies, while costing considerably more.
Income protection is not present within all life insurance policies, and policies without this element tend to be cheaper than those with some aspect of it due to the lower likelihood of payout. Similarly income protection can be purchased as a stand-alone policy, although it tends to be cheaper when bundled with life insurance as the administrative costs are lower and any medical examination will only be required once.
The income protection payout will rarely be at the previous full income level and therefore it will not act as a total income replacement. The level of income that is insured will depend on the premium. The payout for these policies may be cut if the policy holder is earning any salary or money at all; however, this will depend on the individual policy.