Income Protection Explained

"We're often asked to help people re-enter the property market following a mortgage default.  Of those customers, around 40% have failed to keep up with their repayments due to sickness or accident," says Glenn Maynard, Managing Director of The Mortgage Store.

Income protection insurance works by providing an income stream to the borrower if they are unable to work as a result of sickness or injury. Benefits are paid monthly as income and are designed to cover important overheads such as food, clothing electricity, medication and mortgage or rental repayments.

"While comprehensive car insurance is seen as mandatory in Australia, it's surprising that homeowners don't have their biggest monthly outgoing, their mortgage payments, covered.  One simple accident and you could be unemployed for a year," Mr Maynard said.

According to Maynard, Australia, whose residents take out more than 50,000 new home loans a month, has a poor up-take of income protection compared to other countries.*

"Mortgage payment protection insurance (MPPI) sales are rising in the UK - at the end of last year, around a third of all new mortgages were protected by the insurance.  In some states in the US, mortgage insurance is compulsory until the owner has at least 25% equity in the property.**

"Overseas there is greater understanding of the products and a willingness to take out insurance.  Many Australians assume a 'she'll be right' mate attitude or believe they are covered adequately by their employer which in many cases is incorrect," Mr Maynard said.

In Australia, the largest group with income protection are the borrowers with a residential and investment loan.  According to Maynard, the higher the level of debt, the more important insurance cover becomes.

An income protection insurance policy pays the insured a selected monthly benefit (maximum 75% of gross income) if a sickness or injury prevents the policyholder from being able to work.

The definition of 'able to work' depends on the Assurance Company and the type of policy they offer.  The definition of 'work' can either be an 'own occupation' definition i.e. your current employment, or an 'any occupation' definition.

There are also many definitions of 'able to'.  Two examples of these are:

  • not able to perform at least one important duty necessary to produce their income
  • not being able to generate at least 80% of their income.
"At The Mortgage Store, risk assurance is discussed at the initial meeting with the borrower.  It is explained that the liability of a loan increases the need for income protection and is therefore strongly recommended.

There are many factors that affect the premium level such as the initial waiting period during which no benefit will be paid, the term of the policy, or extra benefits being paid for a specified sickness.

"There are so many variables that you can mould the policy to suit your needs or budget.  For example a policy with a level benefit equal to 50% of your income and expiring in 5 years would carry a lower premium than one that carried the maximum 75% of your income and terminated at age 65.

"The premiums for an income protection policy are tax deductible providing a further incentive to sign up.  The policy owner can state the total premium paid each year in his/her tax return.  The client can reclaim the highest income tax rate paid that year of this amount,".
says Mr Maynard.

The Mortgage Store stresses that as income protection 'products' differ depending on the insurance company it is essential to seek advice through a qualified planner to make certain the definitions are suitable to your needs.

We can help you with free advice on income protection.

KB:     Q0009
Last Updated:     26 Sep 2006
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