Income Protection Insurance Premiums
Income protection insurance is a type of cover for individuals who want to protect their income in the event of sickness or injury that leaves them unable to work. By replacing a percentage of your income, it provides support, helping you manage living expenses, loan repayments, and other financial commitments during recovery. But like all insurance products, income protection comes at a cost, which is the premium you pay to maintain the cover.
This blog will explain income protection insurance premiums, why they vary from person to person, and what factors influence the amount you pay.
Income Protection
Income protection is a form of insurance that is designed to protect your income. This insurance pays a percentage of your pre-disability income if you are unable to work due to illness or injury. Unlike other types of insurance, income protection doesn’t just offer a lump sum payout, it provides ongoing payments that can replace a portion of your income during the time you are off work. Typically, this cover will pay a portion of your pre-disability income. This income can be important to maintain your lifestyle, cover bills, and support your family if you’re unable to work for a period of time.
Income protection cover may pay a partial or total disability benefit, this will depend on the particular insurance policy. Income protection is flexible and it allows for different ownership types, waiting periods, benefit periods, and features.
1) The ownership type can be structured through super, personally, or a combination of both.
2) The waiting period refers to how long you are required to wait before the payments start. Most income protection policies offer a waiting period of between 14 days and two years.
3) The benefit period is how long the payments will continue if you remain unable to work. Most income protection policies offer two years, five years, or up to a specific age (for example age 65).
4) The features and benefits will vary depending on the insurer and product selected. Some products offer more comprehensive features.
What Is an Income Protection Insurance Premium?
An income protection insurance premium is the regular cost paid to keep the policy active. It’s often paid monthly or annually, depending on the preference, and the cost can vary based on factors such as occupation, health, and policy terms. The premium also reflects the level of risk the insurer takes on by covering you.
Income protection policies generally have two main premium structures:
Stepped Premiums: These premiums are recalculated at each policy renewal and then increase each year.
Level Premiums: These premiums charge a higher amount at the start of the policy, but changes to cost aren’t based on age so increases generally happen more slowly overtime.
Factors That Influence Income Protection Insurance Premiums
There are several factors that impact insurance premiums, some of which relate to personal characteristics, such as occupation, health or hobbies, while others are based on the terms and features of the policy. Below is a breakdown of some of the key elements that insurers consider:
Occupation
The occupation has a large impact on the insurance premium, as different occupations carry varying levels of risk. Lower risk occupations with minimal physical duties, such as office or administration roles, are considered low risk which can result in a lower premium. High risk occupations with significant physical demands or higher likelihood of injury, such as construction or mining, are classified as high risk. These jobs tend to have higher premiums due to the increased chance of making a claim.
Smoker Status
The smoker status is another key factor in calculating insurance premiums. Because smoking is linked to health risks and conditions, smokers are statistically more likely to make a claim, which can lead to significantly higher premiums charged by insurers.
If you are a smoker but have quit or plan to, the good news is that most insurers can reclassify you after a period of time which can lower the premiums significantly.
Waiting Period
The waiting period refers to how long you are required to wait before the payments start. Most income protection policies offer a waiting period of between 14 days and two years.
Shorter waiting periods can result in higher premiums, as the insurer will start paying benefits sooner.
Longer waiting periods can result in lower premiums because you are agreeing to cover yourself financially for a longer initial period. This also means that shorter-term injuries may be resolved during the waiting period.
Benefit Period
The benefit period is how long the payments will continue if you remain unable to work. Most income protection policies offer two years, five years, or up to a specific age (for example age 65). A longer benefit period is generally more expensive as it covers a longer period of time.
Age and Gender
As we age, the likelihood of health issues increases, which typically leads to higher premiums. Additionally, cost per gender can slightly vary, this varies by insurer.
Health History
Insurers assess health history to gauge the overall risk. If there are pre-existing health conditions, a history of significant illness, or family history this can lead to higher premiums, as the likelihood of a claim may increase.
Policy Inclusions and Optional Add-Ons
Income protection policies offer additional features to enhance the cover. These additional benefits can increase the premiums.
Why Are Income Protection Premiums Priced the Way They Are?
Income protection premiums are calculated based on a combination of personal risk factors and policy terms, some of which are outlined above. By assessing factors such as occupation, health, waiting period and benefit period, insurers estimate the likelihood of a claim and the potential cost if a claim occurs.
In a simplified sense, income protection premiums are a balancing act for insurers, they aim to provide cover while maintaining financial risk and ensuring they can continue to operate.
While premiums may seem complex at first, considering the factors that influence them can help to make informed choices.
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