Notice period in income protection policies

Income protection insurance contracts allow the insured to select the waiting period before benefits are paid. The minimum period is usually 30 days, and further options can be 90 days, 120 days and even as long as 24 months.

The longer the waiting period the lower the premium.

The position for a 35 year old female, non-smoker with an annual income of $80,000 and a sum insured of $60,000 (ie 75%) is tabulated here:

Waiting period Benefit details Premiums*
14 days indemnity value, stepped premium, benefit period to age 65 $1,949.62
30 days indemnity value, stepped premium, benefit period to age 65 $1,178.30
60 days indemnity value, stepped premium, benefit period to age 65 $864.18
90 days indemnity value, stepped premium, benefit period to age 65 $698.48
1 year indemnity value, stepped premium, benefit period to age 65 $629.27
2 years indemnity value, stepped premium, benefit period to age 65 $596.65

It’s fair to say the industry default position is a 30 day waiting period.

It’s not clear why this is so. The premium savings connected a longer waiting period are significant and can be used to increase the sum insured. Most clients will be able to get by for say 90 days without any income: a combination of sick leave, annual leave, Centrelink, cash savings, home equity, a credit card, a partner, other family or even friends means they will be OK.

Many clients will be able to get by for longer periods. Many clients who are members of industry funds will have universal two year cover, and it can make sense to not double up for these clients and to recommend 24 month waiting periods, so the extra cover kicks in as the industry super cover ends.

This highlights the income protection cover as “catastrophe insurance”. The client self-insures for minor short term incapacities and focuses their premium dollar on long term incapacities. Recommending a client has a longer notice period improves affordability, increase the potential sum insured and, very importantly, helps show your advice prioritises the client’s interests over your interests by lowering the premium, and therefore the commission, below what it otherwise might be.

The Dover Group