Income Protection Insurance covers up to 75% of your income should you be unable to work due to accident or illness. The cover is in proportion to your lost income, to provide enough financial support for you to return to work. The reason it does not cover 100% of your income is because it is not designed to put you in a better financial position than you were before you made a claim. If that was the case, lots of people could take out income protection and try to get into a position where they could use it to replace their income.
When you make a claim, depending on your policy, there could be a waiting period.
An income protection waiting period is the time you must wait from when you become unable to work due to accident or illness, to the time you become eligible to receive your income protection benefit payments. Depending on your policy, waiting periods can range from 14 days up to two years. Income Protection claims are paid one month in arrears.
With an agreed value policy, you are required to verify your income when applying for income protection and your income is agreed to at the start of your policy. This means you will know what you will receive regardless of your income at the time of claim.
Generally, clients who are self employed or are concerned about fluctuating income will consider an agreed policy. This option is not as cost effective as an indemnity policy, but it does provide you with certainty at the time of claim.
An indemnity style policy insures you for the income you say you are receiving at the time you complete the application. You are then required to verify your income at the time you claim. If your income has reduced since you applied for cover, your claim may be paid on the reduced amount. If your income has increased since you applied for your cover, you will be paid out up to the sum insured. The insurer will consider your earnings 12-24 months prior to you lodging a claim.
Generally, clients who are not self-employed or concerned about income fluctuation will consider an indemnity policy. This option is also the most cost effective.