How Does Income Protection Insurance Work?

Quick… think about how you would pay all of your bills if you suddenly couldn’t work because of an illness or injury.  How long would you be able to sustain life without creditors hassling you?  Sounds like a nightmare, doesn’t it?  Luckily, this nightmare will never happen in real life if you have income protection insurance!

What is Income Protection Insurance?

Like the name suggests, income protection insurance protects you in case you lose your income due to illness or injury.

However, you can’t just pick any ol’ plan.  Each income protection plan comes with different rules.  For example, virtually all of them come with a waiting period — a length of time that has to pass before you get any money.  It is often referred to as an elimination period.  Many plans have a 30-day waiting period, but you can find plans that have shorter and longer waiting periods.  In any event, you need to know how long you’re going to have to wait for your first check.

If you want a shorter waiting period, you’ll likely have to pay extra premiums for it.  Yes, that’s an added expense, but it can be well worth it if you don’t have enough saved up to cover 30 days of expenses without any money coming in!

Just remember, income protection insurance is considered a last resort.  That means it will only kick in AFTER you’ve taken advantage of all of your other benefits.  For example, if you have two weeks’ worth of sick time, you’ll have to use that up before you can file an income protection claim.

And, depending on the specific plan you sign up for, you STILL may not be able to tap into your income protection benefits, even after you’ve exhausted everything else.  That’s because some plans say that you have to be completely disabled in order to get any money.  If you can do ANY type of work — including part-time work — you won’t qualify for income protection.  So, read the fine print carefully before you sign on the dotted line!

So, what happens when you do qualify for income protection benefits?  How much money will you get?

Your insurance company may look at your salary from the past 12 months to determine how much money you’re entitled to.  So, if you just got a raise two weeks ago, it won’t be factored into the calculation.  That’s why it’s so important to learn how your plan is calculated before you sign up.

Your income protection benefits won’t just cover your salary, though.  They’ll cover EVERYTHING you get in compensation — like overtime, your car allowance, and any other fringe benefits.  So, be sure to report everything your employer gives you when you sign up for a plan!

Luckily, your income protection benefits will automatically be worth more every year, because virtually all plans are built to withstand inflation.

One final tip — look carefully at your plan’s “benefit payment term”.  If you get sick enough or injured so badly that you can never return to work, you’ll need to know how long your income protection benefits will be paid out.  Some plans will pay you until you turn 65, while others max out after a year or two.  In any event, your benefits WILL run out eventually, so find out when that will be.  The last thing you need is a surprise!

One Response to How Does Income Protection Insurance Work?

  1. My company provides a pretty good disability insurance plan that pays 60% of my paycheck until I reach 65. There is a 30 day waiting period before benefits would start. Of course, since the company is paying for it, any insurance payments will be taxable. If I were paying for it with after tax dollars, the insurance payments would be non-taxable. Even so, I am happy with what our company provides.

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