Income Protection provides you with 75% of your gross income if you are unable
to work due to sickness or injury.
There are two types of income protection policies, agreed value and indemnity cover, there are premium differences between each type
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Why Income Protection?
Why Income Protection:
The main reason for establishing income protection is to provide you and your family financial security in the event that you are unable to work due to sickness or injury. Everyone has sick leave, however what would happen to your financial situation if you were unable to work for 12 months due to sickness or injury? How you you pay the bills, meet mortgage repayments and other fixed expenses?
There is no specific list of events that allow you to claim on an income protection policy, the usual definition is if you are unable to perform one of your important income producing duties of your occupation. Note that the exact definition can vary from company to company.
Knowing that you have a requirement for cover is the first
step, the next step is to work out how much cover, the type of cover you need
and then the best method of taking out the cover.
Initial Considerations:
Ideally everyone should have income protection in place, and have a policy with
a short waiting period and a long benefit period. However commercial reality is
that premiums can be high depending upon your occupation, so the waiting and
benefit period are often determined by premium.
The two main variables with income protection are the waiting period and benefit period:
Waiting Period
This determines how long you are unable to work before the policy starts to pay your claim. For example with a 30 day waiting period your claim would start after you have been unable to work for 31 days. There are a wide range of waiting periods as options on policies, including 14, 30, 60, 90, 180 day, 1 year and 2 year.
Benefit Period
The benefit period is how long you will receive payments in the event of a long term claim. This can be 2 years, 5 years, or to a specific age, e.g. age 60 or age 65. Ideally people take cover with a long benefit period as this will provide a high level of cover.
Types of Cover:
There are two main types of income protection policies:
Agreed Value
This is where you prove your income at the application stage, and the insurance company agreed to the monthly benefit. This means that in the future, regardless of if your income reduces, you will be paid the agreed monthly benefit. This also means that in the event of a claim financial evidence will not need to be produced.
Indemnity Policies
This is where financial evidence is not required at the application stage, but will be needed in the event of a claim. However if your income reduces in the future the policy will only pay 75% of your lower income level. Indemnity cover does have lower premiums than agreed value. For salary based wage earners indemnity cover is an attractive lower cost form of cover.
Increasing Claim
One important option that should always be taken with an income protection policy is increasing claims. What this does is increase your monthly benefit each year when you are on claim. For example; suppose you are on claim now and getting a monthly benefit of $3,000. After 12 months on claim if you have the increasing claim option this monthly benefit is increased with inflation to $3,100.
Although this may not seem important, if you were on claim for 20 years, without this option in 20 years you would still be paid $3,000 per month. Whereas if you had increasing claims and assuming inflation of 3% you would be paid $5,250 per month.
Caution
Financial Advisers
and brokers are often extremely worried about potential liability in the future
when looking at the amount of cover you should establish. Everyone has their
'ideal' amount of cover, but often the expense simply makes it uneconomical to
establish. Remember, this is the type of insurance that after 20
years you should be pleased that you never claimed on!