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.
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.
