Income protection is an important financial safety net for people who are unable to work because of illness or injury. A standalone policy is one option or it may also be available for purchase as part of a superannuation fund membership.
However, why do some people own multiple income protection policies? Is this permissible? Do you have the option of claiming on more than one policy at the same time?
An overview of income protection policies
People may have multiple income protection policies for a variety of reasons, and there is no rule preventing you from having them.
For instance, your super fund may provide only a certain amount of income protection, which may not fit your needs. It can be beneficial to purchase a standalone policy to fill in any gaps in your current coverage.
Insurers typically incorporate offset clauses into income protection policies that prohibit claimants from receiving more than a certain percentage of their gross salary during unemployment.
You can, for example, have three income protection policies that all provide payments equal to 75 per cent of your gross salary; however, you can’t claim the full amount. Your combined coverage would typically be limited to 75%.
Why should you be aware of the zombie protection policy scandal in Australia?
In a report published earlier this year, the Productivity Commission found widespread issues with Australia’s superannuation fund management system, resulting in multiple income protection policies.
Over 17 per cent of workers in the country hold multiple super accounts, mostly as a result of changing jobs during their careers. Duplicate accounts make up one-third of all super accounts nationwide.
Consequently, many Australians pay fees for ‘zombie’ insurance protection policies that provide no coverage at all. Many people pay multiple premiums but cannot claim on multiple policies at once.
In addition, members cannot claim income protection while unemployed, but Super Funds will still charge fees and premiums to them. A worker’s retirement pot can be eroded by as much as $60,000 throughout their career by zombie income protection policies.
Limitations to dual income protection policies
A dual income protection policy has certain limitations. While you are out of work with injury or illness, insurers will only pay you a certain portion of your earnings.
Consider the case in which you have two income protection policies. The two of them each cover 50% of your income. You’ll only receive a payout from one of these policies as both of the insurers’ maximum payout is 50%. If you aren’t aware of this, you’ll soon discover that your second policy was a waste of money.
This is not always the case, however. Consider a situation where you have two income protection policies, each covering 25% of your earnings. With the maximum limit of 50% set by the insurance companies, you could claim on both policies and receive payouts. As opposed to the number of policies, it’s all about the level of coverage.
What is the benefit of having more than one income protection policy?
Multiple income protection policies aim to help people manage both short and long-term financial losses associated with illness or injury. Common strategies include:
Coverage is provided for the first two years following a disability but at a reduced benefit (60% of income, for example).
Then you can combine that with a policy that pays 75% of the insured’s income up to five years after a two-year waiting period.