Income Protection Insurance
Written by: Canny Advisory
We often ask our clients what they feel like their most valuable asset is. Some will say their car, some will say their house, and some will say their 1960s Fantastic Four 1 comic. We then bring up that actually, their greatest asset is the ability to earn an income. Someone who earns an income can pay their car repayments, and their mortgage, and fund other purchases that they want to make!
Unable to Work? Claim on your Insurance!
A lot of people don’t actually know what income protection insurance is or what it covers, or that it is completely different to what their Private Health Insurance covers if they have it. Income Protection covers from 75-85% of a person’s income in the event that they are unable to work whether it is for a short-term or a long-term disability. As long as the person is unable to work, due to an accident or illness, and meets their pre-determined waiting period, the insurance company will provide them with their applied for monthly benefit. With the monthly benefit, you can also insure for less than what your actual income is, as a way to reduce premiums, if you feel you can survive on less income.
What About Waiting Periods?
Waiting periods can differ from 14 days, up to two years. More commonly, the waiting periods will either be 30 days or 90 days.
The shorter the waiting period is, the more expensive the cover will be. People just need to weigh up how long are going to (realistically) be able to provide for themselves. Some research I’ve done in the past shows that the sweet spot for premiums is usually a 90-day waiting period. This means you go without income for 90 days, commence your claim period, and get paid in arrears 30 days later.
For those that might not have access to private monies, sick leave, annual leave, or even long service leave they require a much shorter waiting period, which can have a big impact on their premiums.
Do You Have To Have A Long Term Disability to Make A Claim?
Another misconception is that people think to claim on Income Protection Insurance is that you have to be totally disabled, which is absolutely not the case.
Some covers have multiple definitions that they will apply to see whether or not you’re entitled to make a claim under partial disability. This could be an amount of hours worked, the amount of duties you perform, or the level of income you can earn.
Income Protection Insurance policies can be bare bones or fully featured. Some products will even provide assistance enabling you to return to work sooner, with things like rehabilitation programs, physio and other supports services included. These can be inbuilt or added on at an extra cost depending on what your wants and needs are.
Can Everyone Get a Monthly Benefit?
It is important to note that whilst Income Protection Insurance is probably the most necessary insurance to have, not everyone is able to get it. Or if they can get it, they may be some loadings or exclusions that may apply, dependent on a client’s previous medical history.
For example, I have had a client who was a builder who previously, had a history of a bad back, and had time off work because of this injury. He was given a lower back exclusion. Just because this happened, does not mean that if he were to be in a car accident with back injuries as a result that the insurance company would not necessarily payout, they would investigate and ascertain that the accident was not caused by the injury, and that a reasonable person would sustain the same injuries in the accident, regardless of the fact if they had a pre-existing back problem.
The people with a bad health history that might not get traditional Income Protection Insurance, please do not despair. There is always accident only Income Protection Insurance that we are able to help you in seeing if this might be an appropriate option for you.
This means that you can get the cover, without full underwriting, and if you were to have an accident – the policy would pay you out your monthly benefit. I have used this quite a few times with our clients hat may have BMIs too high for insurance for example, or other exclusions that might result in them not being offered the traditional cover.
Do I Financial Planning For How Expensive This Insurance Might Be?
So far it is all doom and gloom with insurance, and a lot of people think it is prohibitively expensive, and this is not always necessarily the case.
On average, premiums can be 2-3% of a person’s annual income, depending on features and things like waiting periods, benefit periods, and monthly benefits. If paid privately, Income Protection Insurance is tax-deductible. However, please do not think that if you cannot pay for it privately that you’re not going to be able to have it. These premiums can be paid via private preferences, and what features you want to form part of your policy.
Another instance in which I have helped clients is around parents paying for the premiums of income protection for their children until they are sufficient enough to pay for it themselves. The reasoning behind this for the first person I discussed this option with, was that the client could easily afford to pay the $1,000 per annum premium for their child, which would provide the child with around $36,000 per annum until the child was 65 years of age, but wasn’t going to be able to cover the child’s expenses such as rent of $250 per week, their car loan re-payments of $500 per month, as well as their food expenses, clothing and all other expenses.
Financial Advice from Canny Advisory for Your Plan B
So, back to the Plan B questions in the title – what is your Plan B if you were unable to work for an extended period of time due to injury or illness? If you don’t have one or say that you can not afford Income Protection Insurance because it is too expensive, my reply to that, is can you afford not to?
At Canny Advisory, we are happy to sit down with you and undertake a full risk insurance needs analysis to work out where there may be some gaps in your overall position or ascertain where you may actually have too much cover in place than what you required, which definitely does also happen.
Insurance + Protection is a part of life and it is something you can’t afford to not have in place to protect your lifestyle and your family’s tomorrow!
Please don’t let the negative news reports stop you from acting. Insurance companies do payout, assuming you have been honest with them and meet the policy definitions. The reason why insurances are more expensive is because of the fact the insurance companies are paying out. Get in touch today to make a time to come in, and we’ll put you on the right path to ensure you have a Plan B to take care of your Plan A – YOU!
