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What is Income Protection Insurance?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 17 August 2016
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Income protection insurance is an insurance policy which is designed to provide the policyholder with a steady source of income in the event of disability which prevents the policyholder from working. Many nations already have systems in place to provide disability insurance, but these systems only apply to workers who pay into such funds, which usually does not include people who are self-employed. Government disability benefits are also available to people who are permanently disabled, but not to people experiencing temporary income loss due to disability, and income protection insurance can help someone weather a period of unemployment due to disability without needing to worry about money.

This type of insurance provides a monthly payout known as an indemnity. The payout is usually fixed as a set percentage of the policyholder's income. Income protection insurance can also be purchased as a rider for certain types of financial agreements like car loans, credit cars, and mortgages; in this case, as long as someone is disabled, payments will be suspended without penalty. Income protection insurance can also protect health care coverage.

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When someone purchases a policy, he or she is given a choice between income protection insurance which covers the policyholder in the event that disability makes the policyholder unable to perform any kind of work, or simply unable to work in his or her chosen occupation. Insurance which covers someone's own occupation tends to be more expensive, as the insurer would prefer to see policyholders taking on work of some kind if they can. Income protection insurance also comes with an elimination period, a length of time during which benefits are not provided.

As with a deductible for other types of insurance, the larger the elimination period, the cheaper the policy will be. People need to consider the amount of time they can live without income when selecting an elimination period. Someone with funds in savings, for example, might find a six month elimination period endurable, while someone with limited savings and lots of expenses might need a 30 or 60 day elimination period.

Before income protection insurance benefits will be paid out, the policyholder will need to prove that he or she has become disabled, and that the disability is included in the policy. Previously existing conditions are not covered, as are disabilities caused by negligence. The broader the scope of the definition of “disability,” the more expensive the policy will be.

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Monika
Post 3

@indemnifyme - It sounds like you work in the insurance industry. You say income protection insurance is good because you have to "jump through a lot of hoops" to get Social Security. However most insurance companies try as hard as possible to find a reason not to pay a claim.

I would urge anyone who is in the market for this type of insurance to compare income protection insurance policies. Really take the time to read what the policy says and see what you'll have to actually do to get paid for your claim.

I've had enough health insurance claims denied for stupid and unfair reasons that I'm very skeptical about this type of insurance.

indemnifyme
Post 2

@ceilingcat - The cost for income protection insurance is variable. Much like the cost for other kinds of insurance the cost for income protection insurance depends on a variety of factors and how much coverage you want. Some factors include age, sex, overall health and occupation.

That being said I've seen policies run from 90 to 200 dollars a month.

Also you are right when you say Social Security disability is often not enough to cover the cost of living. Most people also aren't aware that you have to jump through a lot of hoops to get it as well. Income protection insurance policies such as critical illness insurance can be a god send in an unfortunate situation.

ceilingcat
Post 1

I've been looking into purchasing unemployment income protection insurance recently. I always thought if I became disabled Social Security benefits would be enough to take care of my bills.

However a few months ago one of my friends became unable to work and her disability is only around a thousand dollars a month! That isn't enough to cover her expenses and it wouldn't be enough to cover mine either.

I'm a single mom so it is especially important for me to be able to provide for my family. I have enough money in savings to choose a 6 month elimination period so I'm hoping my unemployment income protection insurance won't be too costly.

Does anyone know how much an income protection policy runs per month?

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