What is disability and income protection cover?
Your ability to earn an income is often your biggest asset, and the people who depend on you rely on it too. This cover pays out if illness or injury stops you from working:
- Lump-sum disability cover pays a once-off amount if you are permanently disabled. You can use it to pay off debt, adapt your home or car, or invest for an income.
- Income protection pays a monthly amount while you cannot work. Depending on the policy, it can pay for a temporary illness or for as long as a permanent disability lasts, up to an age set in the policy.
How does it work?
- The definition of disability. Each policy sets out when you count as disabled. Some pay if you cannot do your own job. Others pay only if you cannot do any job that suits your training and experience. This matters most when you claim.
- The waiting period. Income protection starts paying after a waiting period you choose. A longer wait usually means a lower premium.
- How much it pays. Insurers limit income protection to a share of your income, so that you are not paid more for being off work than for working.
- How long it pays. Payments continue until you recover, or until the end of the cover term.
How is it taxed?
Since 1 March 2015, premiums on disability and income protection policies you own are not tax-deductible, and the benefits you receive are tax-free.
If your employer pays for group cover, the premiums are added to your taxable income as a fringe benefit, and the benefits are then tax-free.
Things to know
- Cover at work often ends when you leave your job, and it may not include commission or bonuses.
- Self-employed? Keep good records of your income, because you will need to prove it when you claim.
- Disclose your health fully when you apply. If you leave out something that would have changed the insurer’s decision, it can turn down a claim.
- Moving abroad? Check whether your cover can go with you before you leave.
Who it suits
This cover suits almost everyone who works, especially if you have a bond, a family who depends on your income, or no other income to fall back on.
When you are starting out, it often matters more than life cover, because your future earnings are what you most need to protect.