Personal Sickness, Accident Insurance vs Income Protection
If you have existing personal sickness and accident insurance policies, you might be wondering about the differences between this type of cover and traditional income protection insurance policies. The short answer is that personal sickness and accident insurance policies can be cancelled by the life insurance company, whereas income protection insurance policies cannot.
Personal Sickness & Accident vs Income Protection Insurance
In the case of personal sickness and accident insurance, policies can either be cancelled by the insurance company, or the insurer may decline to offer renewal of the policy, if there are changes in the life insured’s health or occupation (2).
On the other hand, income protection policies issued by life insurance companies are generally guaranteed renewable. A guaranteed renewable policy means that an insurer cannot cancel the policy, or increase the premiums. This is irrespective of the number of claims made under the particular policy, or any change to the state of your health, occupation, or past-times.
Personal sickness and accident policies are usually issued by general insurance companies. They are often marketed as disability cover for specific industries or occupations. Income protection insurance is generally marketed by life insurance companies.
Please note: Personal sickness and accident insurance should not be considered as an alternative to private health or income protection insurance (1).
In addition, Personal Sickness & Accident Insurance policies are usually indemnity style products. This is where the monthly benefit upon claim would be based on the insured’s actual income in the 12 months prior to disability. However an income protection insurance policy with an agreed value or guaranteed option ensures the life insurance company will not review or reassess the monthly benefit shown on the policy schedule in the event of total disability, regardless of a decrease in income.
Personal Sickness and Accident Insurance policies can cover up to 100 per cent of the insured’s income, but only up to a five year benefit period. Some policies can be taken with a zero day waiting period but have a maximum benefit per total disability claim of $30,000. On the other hand, income protection insurance covers around 75 per cent of insurable income, with a minimum waiting period of 14 days, but with a benefit period up to the age of 65.
Waiting and benefit periods
Personal sickness and accident insurance policies can be taken as sickness only, accident only or a combination of both, with different waiting and benefit periods. Income protection insurance providers no longer offer different benefit periods for sickness and accident, so a person who takes a benefit until age 65 will be covered for both illness and injury until that time.
Personal Sickness and Accident insurance policies have a far broader range of exclusions than income protection insurance policies. For instance, they often include the following terrorism; participation in organised football; driving or riding in any kind of race, mental illness; HIV/AIDS; and even exposure to radioactivity which are not generally excluded in income protection insurance policies (3).
Personal Sickness and Accident Insurance policies also have riders or additional policies covering ‘capital benefits’ (accidental death, permanent total disablement, permanent unsound mind, loss of limbs and sight, etc) and critical illnesses. These policies are also cancellable.
Case study between sickness, accident insurance and income protection
Consider Brian, who is currently a barrister, and has an ongoing personal sickness and accident insurance policy.
Brian recently decides he has had enough of law and wants to pursue his lifelong dream of being a stunt man. Under a sickness and accident insurance contract, Brian would generally need to inform the insurance company that he has changed occupation and it will then be up to the insurance company to decide if the policy would continue and under what terms. It is unlikely a general insurance company would continue cover for Brian.
Also, some of these policies will actually stop paying benefits if the insured commences a new occupation whilst on claim. With income protection insurance policies, the cover would continue as if Brian were still a barrister, and a disability claim would be measured against the duties of his new, more hazardous occupation. If Brian injured his hand, it is likely he would be totally disabled from his new occupation.
The main difference
Personal Sickness and Accident Insurance policies are generally suitable for short to medium-term disability cover, but may be cancelled at the insurers discretion. They are no substitute for income protection insurance coverage.
Income Protection Insurance provides longer term cover and benefits, as well as security for people, who can rest assured that only they can cancel the policy throughout the life of the policy
1 Australian Bankers, Association (ABA),Investment and Financial Services Association (IFSA) and the Insurance Council, Smarter Insurance. Protect your assets and secure your future, October 2006, p 15.
2 Most sickness and accident policies are annually renewable, but some are issued for two years.
Source: CommInsure 2010
Protect your income protection from increases in inflation with the increasing claims option – which increases your monthly benefit if you go on claim
Waiting periods for income protection refers to the length of time you are willing to wait until your claim benefit starts being accrude. It can range from 14 to 720 days