Income Protection Exposed!
One of the most important types of insurance that a person should have is income protection
. Any person whose standard of living depends on them earning an income should protect this most important asset - their ability to produce an income.
When purchasing an income protection policy there are a number of key points that a purchaser should keep in mind:
- Is the contract a cancellable or a non-cancellable contract?
- Guaranteed or indemnity contract?
- What is the maximum % of income that a person can insure?
- What is a waiting period and how does it operate?
- What is the benefit period and how does it operate?
- Indexation - Yes or No!
- Are stepped premiums more suitable than level premiums?
- Will I be covered if I am retrenched or become unemployed?
Non cancellable or cancellable contracts. One of the key features when purchasing an income protection policy is to ensure that the policy is a non cancellable contract -i.e. once accepted by the insurer the policy is automatically renewable irrespective of your claims history. With a cancellable policy however the insurer reserves the right to cancel the contract prior to renewal. This may occur in the event of an individual's claim history or the potential claims from a group or particular occupation that the particular insurer now deems to be an unacceptable risk.
Guaranteed or Indemnity contract. With a guaranteed contract the sum insured (monthly benefit) is underwritten up front based on supporting financial evidence - e.g. payslips, and other forms such as your tax return. Once accepted by the insurer the monthly benefit is guaranteed to be paid at claim time. An indemnity contract works differently because the benefit payable is calculated on the individuals earnings which they have to prove at the time of a claim - this can be a problem if that person has suffered an illness but continued to work albeit in a reduced capacity hence lower earnings.
Maximum cover available. The maximum benefit payable in Australia is 75% of your usual income with some insurers allowing an additional 9% (for superannuation/retirement contributions).
Waiting Period is the amount of time you need to be off work before a claim commences. The shortest period is 14 days, with the standard being 30 days and the longest waiting period 2 years. Usually a person would link this to the level of accumulated sick leave that they have. Usually, the shorter the waiting period, the higher the premium.
Benefit period defines the maximum length that you will be paid for. Better quality polices have benefit periods up to age 60 or 65.
Indexation of Benefits. It is important to include indexation of benefits if you take a long term contract. This way the real purchasing power of your benefit is preserved.
Level or Stepped premiums. If you have a long term need which is generally over 15 years, you would be best advised to take out a level premium contract where the premium over the long term is averaged out and you pay a consistent premium level. If you only require cover for a short time frame of under 10 years you should take advantage of the initial premium savings found with stepped premiums.
Unemployment/ Retrenchment. Income protection policies are designed to cover loss of income through illness or accident only. Better quality contracts will however suspend cover if you are unemployed or retrenched and allow you to recommence (with limited underwriting).
Top Tips to keep the costs down include using level premiums, possibly splitting benefits to have some level of benefit with a 30 day wait and some with a 90 day wait. By paying annually you may find this is cheaper than paying monthly as many insurers have frequency loadings for monthly payments (up to 7%). If income premiums are tax deductible in your country ensure that you remember to claim your income protection premiums as a deduction - we have seen a number of individuals who have forgotten to do this.
Remember if it is hard to live with an income how hard would it be without one - act today and call your insurance adviser and protect your most valuable asset.
by: Jacqui Chase
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