Calling all freelancers and others whose earnings are inconsistent – have you thought about income protection insurance?

There are multiple reasons for people with variable and inconsistent income to have income protection cover. This applies to when you are sick and have no income or to cover utilities while not earning. This article explains how you too can make use of such benefits.

According to the Australian Bureau of Statistics, in May 2016 there were 39.7% part-time workers, 22.6% being casual employees (http://www.abs.gov.au/ausstats/abs@.nsf/mf/6306.0/). If you fall into one of these groups, you still have bills to pay when ill or injured. Therefore it is safest to have income protection: you can obtain this even if your salary is not fixed. 

The essence of income-protection insurance 

For those self-employed or involved in contract work, in every position in which your salary is fluctuating, injury or illness means no income, placing your livelihood in jeopardy. An income-protection insurance ensures a stable income when you are unable to work. Such policies will cost more than normal policies, however, the benefits are guaranteed.

Every week 5 people sustain spinal cord injury, while 10 to 15 people suffer a severe brain injury (http://www.hwns.com.au/resource-centre/disability-statistics). Having some income protection can help to lessen the burden and financial costs involved in recovery.

 One of  three income protection policies could be suitable for people with unstable incomes. These policies pay out either agreed or indemnity value.

·         A basic income protection provides a 75% cover on earnings during injury or illness. A base rate is paid out calculated on your salary. This will cover the more common health conditions.

·         An accident-only policy, similar to basic income protection, offers cover up to 75% of earnings. This is only in the event of an accident, illness not being covered.

·         If a basic income protection cannot offer you enough, a premium income protection may be a better option. This cover offers extras such as rehabilitation benefits, death cover, and loan cover. 

Alternatives to income protection 

Besides the income protection policies there are also some life insurance policies that may be beneficial. These are similar to trauma insurance, in which a lump sum is paid out in the event of a condition listed on the policy. Another option would be TPD insurance. This is a disability cover that pays out a lump sum if you are hurt or disabled. Lastly, there is life insurance, which also pays out a lump sum on death or when terminally ill. After death, the money will go to your named beneficiary. 

Major elements that affect the cost of the premiums 

Sixty per cent of Australians are older than 15 years, and active in sport (www.abs.gov.au/ausstats/abs@.nsf/mf/4177.0), while 14.5% are smokers (http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyCatalogue/E6DE72422D16BBB4CA258130001536C2?OpenDocument). Both these factors will influence not only your premiums, but also your age, and your occupation.

Another factor that will result in higher premiums is your decision to choose agreed value rather than indemnity value. Besides the amount to be paid out, there is also the waiting period ranging from 30 to 90 days. The longer the waiting period before payout, the lower the premiums. In addition, you can have the benefit period range from 6 months to 5 years, while you recover. However, there are longer period options, accruing higher premiums, and most stopping when you reach the age of 70. 

Selecting either income-protection insurance or mortgage protection

When you are unable to work for a lengthy period, you need to rely on a comfortable stream of income to cover your costs. In Australia, there are two options, namely, income-protection insurance and mortgage protection. These options can offer you cover to meet your normal expenses.

Mortgage protection is very different from income protection, in that it covers no more than mortgage repayment. Income protection, on the other hand, can cover the mortgage repayments as well as other bills. These could include school fees, utility bills, and even rehabilitation costs.  Either way, both come in handy should you, for example, be diagnosed with a serious illness such as cancer. In fact, the Cancer Council Australia has declared that there were 134 000 new cases of cancer in 2017. That number is projected to reach 150 000 by 2020 (http://www.cancer.org.au/about-cancer/what-is-cancer/facts-and-figures.html. However, before simply choosing between income protection or mortgage protection, you should examine the differences and similarities between the two. 

The similarities

Both income protection and mortgage protection offer death and disability benefits. In addition, both have the option for either level or stepped premiums. With the latter, the premiums start off low, increasing as you age. By contrast, a level premium will remain static throughout the policy period.

 The differences

In terms of differences, mortgage protection and income protection differ on benefit payment, flexibility options, basis for claims, and the application process.

·         Insurance cover

Mortgage protection provides a one-off or ongoing payment to cover the mortgage repayments: this cover is compulsory for people buying a home with less than 20% deposit. By contrast, income protection provides up to 75% of your income.

·         Tax benefits

With mortgage protection there are no tax benefits; however, with income protection, the premiums are tax deductible.

·         Pre-existing conditions

Mortgage protection excludes all pre-existing conditions; however, with income protection, even though the conditions may be disclosed, they are not excluded.

·         Flexibility

A mortgage protection has less flexibility compared with income protection, which allows the option for different levels of cover.

·         The application process

A mortgage protection does not require any blood test results or other medical test results to accompany the application. Although the same applies to an income protection application, lifestyle factors such as age, smoking status, inter alia, will affect the type of cover offered and the costs of the cover.

·         Ancillary benefits

Although an income-protection policy will offer various ancillary benefits, the mortgage protection normally offers no such benefits. 

Deciding on the best cover

In most cases, people do not need the extras offered by income protection −  a mortgage protection is usually sufficient. However, as reported by ABC News, some 70% of Australians believe that mortgage protection does not really cover the borrower, but rather, the lender (http://www.abc.net.au/news/2016-09-15/mortgage-insurance-providers-forcing-borrowers-to-bankruptcy/7848746). 

That said, if the premiums of income protection are affordable, this cover could offer you more than just mortgage cover. It can protect your existing lifestyle.