Choosing the Right Options

One of the most common forms of tradesman insurance is income protection, but it can also be one of the most complex when it comes to choosing your options.

At its heart income protection is a fairly simple form of insurance. If you can’t work for a period of time, the policy will replace your income until you are able to return.

But there’s a lot more to it than that, and the options you choose can have a major impact on your ability to make a claim on your policy.

Available Options

The main options that need to be considered when taking out income protection include the following:

• Waiting Period – The amount of time before you can make a claim
• Benefit Period – The amount of time you can receive benefits for
• Benefit Amount – The amount you will receive each month
• Benefit Type – The way in which your benefit will be calculated
• Premium Type – The way in which your premiums are charged

We have detailed each of these options further below.

Waiting Period

The waiting period is the amount of time you must be unable to work for before you are able to make a claim on your insurance.

If for example you had a 30 day waiting period, you would have to be unable to work for 30 days before you could start claiming benefits from your policy.

The waiting periods typically available in Australia are as follows:

• 7 days
• 14 days
• 30 days
• 60 days
• 1 year
• 2 years

The most common waiting period for tradesmen is 30 days, closely followed by 14 days. The 1 and 2 year waiting periods are generally only used in conjunction with a second policy.

The waiting period will have a major impact on the cost of your insurance. The longer the waiting period, the lower the cost of the insurance will be.

Benefit Period

The benefit period on an income protection policy relates to the amount of time that benefits will continue to be paid for once you are on claim.

Most income protection insurance policies will offer fixed benefit periods of 2 or 5 years, or age based benefit periods which can run to age 65 or in some cases 70.

If you have a fixed benefit period you will receive benefits for that time period or until you are able t return to work, whichever comes sooner.

If you have an age based benefit period you will continue to receive benefits until you reach that age or until you are able to return to work.

The benefit period will have an effect on the cost of the insurance, with a shorter benefit period equating to a lower premium.

Benefit Amount

The benefit amount isn’t technically an option, but it is something that needs to be decided upon when taking out your insurance.

Most insurance companies will allow a tradesman to insure up to 75% of their income after expenses, with the dollar amount to be stipulated at the time of applying for the insurance.

For example if your monthly income is $10,000 the insured amount can be up to $7,500. You can insure for less if you wish, but most tradesmen opt for the full 75%.

Benefit Type

Many people overlook this option, but it is still an important one which needs to be considered.

The two different options for the benefit type are indemnity and agreed value.

With an agreed value policy you and the insurance company will agree to an insured amount upfront, and in the event of a claim you will be paid this amount provided that you can show evidence of the income from the time of application.

Indemnity policies are generally more popular with tradesmen, but this is often due simply to them being easier to setup and cheaper to hold. With an indemnity policy your benefits will be based on your income at the time of claim instead of at the time of application.

With a large percentage of tradesmen being self-employed it is important to get this option right. It is recommended that you speak with your insurance adviser about which option will work best for you.

Premium Type

The premium type will have no impact on the coverage you have or your ability to make a claim, but it can have a major impact on how much you pay for your insurance in the long term.

There are two premium types available for income protection, which are known as stepped premiums and level premiums.

With a stepped premium the cost of your insurance will increase each year in line with your age. As you get older the premiums will increase with greater acceleration.

With a level premium the cost of your insurance can still increase due to inflation and other factors, but it will not increase due to your age.

A level premium will generally be more expensive at first, but in the long run it can work out cheaper. The only catch is that you need to stay with the same insurance company for quite a few years before it starts to pay off.

Other Options

There are a number of other options available with income protection. Whilst they may not have as much of an impact on the policy as the options listed above, they can still have an impact at claim time.

The best option here is to speak with your insurance adviser about the options available and which ones may be beneficial or appropriate for you.

Professional Advice

As each tradesman will have different needs and objectives it isn’t possible to say which options are best for everyone. You can of course decide for yourself which options to choose, but a better option can be to seek professional advice.

A tradesman insurance specialist will be able to run through your situation with you to help determine which options you should choose.

If you are simply after the cheapest trade insurance they can tell you which options will keep your premium lower, and if you are after the best possible cover they can also tell you which options are best.

To speak with an insurance adviser you can contact the team here at Tradesman Insurance. Please complete our online quote request form or simply call our office.