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How Tradies Can Utilise Income Protection Insurance

May 17, 2024 | Insurance

Jack, a skilled carpenter, suffered a severe back injury while working on a construction site, causing significant financial strain for his family. As a self-employed tradie, Jack lacked the safety net of sick leave or workers’ compensation, leaving him unable to generate income.

Fortunately, he invested in income protection insurance tailored for tradies, receiving monthly payments while unable to work. This financial safety net allowed Jack to focus on his recovery without worrying about expenses or family.

Income protection insurance is a crucial safety net for Australian tradies, whether self-employed or contractors, to protect against potential financial risks. This article provides an in-depth understanding of how tradespeople can utilise income protection insurance.

Understanding Income Protection Insurance

According to the Australian Bureau of Statistics, 497,300 people experienced work-related injury or illness in 2021-22, with technicians, trades workers, community service workers, machinery operators, and labourers experiencing the highest rates.

Most self-employed or contracting tradespeople lack workers’ compensation insurance or sick leave, necessitating income protection as a workable substitute.

Income protection lets you rest while paying for your living expenses.

Income protection insurance offers financial support in the event that you are unable to work due to illness or injury. It replaces a percentage of your pre-tax income for a specified period, allowing you to focus on recovery without worrying about meeting your financial obligations.

Coverage Amount

The coverage amount of income protection insurance is the amount that an insurance policy pays out to you if you cannot work due to illness or injury. It is designed to help you maintain your standard of living during the period of disability.

Income protection insurance typically covers up to 70-90% of your pre-tax monthly income. This can be capped at a maximum monthly benefit amount, which varies depending on the insurer.

In Australia, there are two main types of income protection policies: indemnity and agreed value policies. Indemnity value policies pay out a monthly benefit based on the insured’s income at the time of claim, while agreed value policies pay out a fixed benefit amount at the time of policy signing.

Starting March 31, 2020, life insurers cannot offer agreed value income protection policies to new customers, but existing policies may remain accessible. All new income protection plans will be indemnity value policies.

How is the Coverage Amount Determined?

The coverage amount is determined by your income before the disability, which is usually based on your annual earnings in the 12 months prior to the claim. This income is used as the basis for calculating the coverage amount, which is then adjusted according to the specific policy terms and conditions.

What should I Consider when Getting Income Protection Insurance?

When selecting an income protection policy, it is essential to consider the following factors to ensure the coverage amount meets your needs:

What to consider when getting income protection insurance

Income Level: Your income level is a crucial factor in determining coverage, as it determines the amount needed to maintain your standard of living during a disability.

Occupation and Job Security: If you have a high-risk or unstable occupation, the insurer may impose premium loadings and/or exclusions to your policy to factor in this higher risk level.

Age and Health: If you are an older policyholder or have pre-existing health conditions, your policy may be subject to loadings and/or health exclusions.

Family and Financial Obligations: If you have significant financial obligations, such as a mortgage, you may require a greater monthly benefit (subject to maximum levels), or consider taking out a combination of insurance types, to meet your family and financial responsibilities.

Policy Type and Features: Choose a policy that meets your needs and consider important features like waiting period, benefit period options, and rehabilitation support.

Premiums and Budget: Balance your needs with your financial capabilities to ensure you can afford sufficient levels of income protection cover to meet your income replacement needs.

Benefits Period

The benefits period is the maximum duration an insurance company will provide monthly benefits to you if you are unable to work due to a covered illness or injury, providing financial support to you until you can return to work or until the benefits period expires.

Longer benefit periods, such as until age 65, provide extended coverage for long-term illnesses or recurring injuries. Despite the higher premium for the longer benefit period, the cost difference between longer and shorter benefit periods might not be substantial, making it a valuable investment for Australian tradies.

Shorter benefit periods, such as 1 or 2 years, can lower your premiums but limit the duration of benefit payments. Payments will cease after the specified period, leaving you financially vulnerable if your inability to work extends beyond the benefit period.

Waiting Period

Your waiting period is the time between your incapacity due to illness or injury and the commencement of income protection benefits. It determines how long a policyholder must wait before receiving benefits, ensuring that coverage meets their financial needs during incapacity.

Most income protection policies have waiting periods that range from 14 days to 2 years, with common intervals including 30, 60, 90, and 180 days.

For example, if you have a 4-week Waiting Period, you receive payments your first monthly benefit at the end of the second month, and following payments will be paid monthly.

A shorter waiting period results in higher premiums due to quicker access to benefits, while longer waiting periods, like 180 days or 2 years, lead to lower premiums and are cost-effective for those with savings or other financial resources.

Tips for Tradies

As a self-employed tradesperson, worker’s compensation should not be your sole financial security. Income protection insurance is crucial for financial protection in case of illness or injury, and it’s essential to understand your coverage options before purchasing.

You can’t rely on worker’s compensation

As a tradie, if you’re a sole trader or in a partnership you cannot have work cover.

Another important factor is that Worker’s Compensation generally only covers work-related illness or injury.

Additionally, if you are self-employed or work as a subcontractor, you may not receive benefits such as paid sick leave, emphasising the necessity for alternative financial protection in income protection insurance.

What are the benefits of income protection insurance?

Consider the benefits rather than the cost

Prioritise the benefits of income protection insurance over its cost, as it ensures financial stability during incapacitation, allowing you to maintain your standard of living and support yourself and your family members. Additionally, when paid personally income protection premiums are tax-deductible. 

This approach helps you understand the value of insurance and make informed decisions about coverage.

You can make your premiums more affordable by carefully reviewing your coverage details. This involves ensuring that the policy aligns with your specific needs and circumstances, which can help reduce the overall cost.

Another option to explore is superannuation-owned policies. Superannuation-owned policies are designed to be more affordable and can be a viable choice for you if you want financial security without breaking the bank.

Always be keen to check the details

Thoroughly review your income protection insurance product disclosure statement, including coverage, exclusions, and limitations, to ensure it meets your financial needs.

Also examine aspects like waiting period, benefit period.

Opt for a fully underwritten income protection policy, as it involves a thorough assessment of your health and medical history, including any pre existing medical conditions. This approach prevents potential exclusions or limitations from undisclosed or undetected pre-existing conditions, providing you with more comprehensive and reliable coverage.

Bonus Tip

Australian tradies would benefit from consulting with a financial advisor who has expertise in insurance for tradespeople.

These advisors are experts in understanding the specific needs and obstacles that tradies encounter. They can offer personalised advice on choosing the right income protection policy.

Here are some benefits of working with a Specialist Advisor:

  • Personalised Needs Assessment: A specialist advisor can assess your occupation, income, financial obligations, and risk profile to recommend the best income protection cover for you.
  • Tailored Policy Recommendations: Specialist advisors know the tradie industry and can find the policy features and coverage levels that best meet your needs, ensuring comprehensive protection.
  • Ongoing Support: A specialist advisor can help you adjust your income protection cover as your circumstances or policy needs change.
  • Expertise in Exclusions and Limitations: Specialist advisor or insurance broker can help you choose an income protection policy by explaining its exclusions and limitations.

Protect Yourself and Your Loved Ones with Newcastle Financial Planning Group 

As a tradie, you can protect your financial well-being with income protection insurance by ensuring that your coverage is appropriate for your income, occupational risks, and health.

Prioritise benefits over costs, thoroughly review policy details, choose fully underwritten policies, and consult with specialist advisors for personalised coverage recommendations and ongoing support.

Seeking the advice of an experienced Wealth Protection Adviser who specialises in income protection insurance can make it easier for you to find the most comprehensive and cost-effective options.

Do you need specialist insurance advice from a professional financial adviser? Newcastle Financial Planning Group is here to help you.

Call us or book online and secure your initial meeting with us today to get started!

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