Almost everyone is at risk of being unable to work due to an illness or injury. Although workers’ compensation and sick leave provide you with some coverage; Income protection insurance is the only insurance that can help you maintain a similar lifestyle as before the injury or illness. An appropriate income protection policy could also allow you and your family to continue meeting financial obligations until you return to work after fully recovering from your medical condition.

Additionally, some of the best income protection insurance policies may provide coverage of up to 85% of your salary, depending on your policy. Thus, regardless of how long it takes for you to recover, you can maintain an active lifestyle close to what you planned.

Many different income protection products on the market can be confusing when comparing the key differences. You should carefully review the terms and conditions of any insurance policy before signing up to ensure that it meets your needs. Besides knowing what you can claim and when to file, you should also know what amount you should expect.

As a guide, we have outlined 5 of the most important characteristics to consider when comparing income protection insurance.

Benefits offset:

An offset of benefits is a reduction in a participant’s benefit payments. A policyholder’s monthly benefit may be reduced based on their income, depending on the provider of income protection policy. As a result, some recipients’ monthly benefits may be drastically reduced. Therefore, it is recommended that financial planners become familiar with the offsets offered by different life insurance companies to determine their difference.

Replacement ratio:

An approximate replacement ratio estimates how much income an individual will need to maintain their lifestyle after the injury. According to APRA’s  Individual Disability Income Insurance (IDII) measures, up to 90% of pre-disability income can be replaced within the first six months of the benefit period. After that, up to 70% of pre-disability income can be replaced.

However, not all insurance companies have adopted the approach. In some cases, products may have a replacement ratio below 70% after a specific age or after a particular period of use.

Usual occupation vs. any occupation:

To determine whether a life insured can find gainful employment after a disability, insurers look at their usual occupation at the time of disability. Nevertheless, certain insurers modify the criteria based on the life insured’s education, training, and experience after a specific period to any occupation. Although the life insured may still be able to work their regular employment, a more valuable clause of total disability could reduce insurance payments.

Sustainable pricing:

Based on the statements made by APRA, life insurers are required to follow industry experience studies and clauses that are not older than 18 months. Additionally, every 12 months, they must conduct their own internal experience study. This prevents insurers from using outdated assumptions when calculating their original premiums.

Sustainability and managing long term benefit payments:

As part of its IDII measures, APRA emphasised the importance of managing long-term claims associated with IDII. APRA offered insurers several recommendations for managing claims, but they were not prescriptive: rather, they encouraged insurers to explore many options for actively managing risk, including:

• Introduction of capability clauses:

Where a life insured’s medical practitioner believes they can return to their usual occupation but does not, the insurer can reduce the monthly benefit payment by the proportion of possible workdays.

• Rehabilitation and retraining:

By providing appropriate rehabilitation and retraining programs, insurers can help their clients return to health, wellness, and work, rather than simply paying out retail income protection claims. Healthy, fit clients are less likely to become ill or injured, and if they do, they are less likely to be on a claim for an extended period, which reduces the risk to insurers and overall premiums.

As retail income protection policies change, insurers should be aware of the advantages and limitations of these policies. Likewise, Aspect’s income protection product satisfies the IDII requirements of APRA while offering client advisers market-leading features and benefits.

Alexis Ramirez