When you insure your most valuable assets, such as your house and car, you may be overlooking the most important of them all: your ability to earn an income. That’s where income protection can make all the difference. It pays out a regular benefit of up to 70% of your regular salary if you’re unable to work due to sickness or injury.
As well as providing peace of mind, income protection can be cost-effective. This is because your premiums are generally tax deductible if you hold your policy outside of your super – making it more affordable to get the cover you need.
To help you make the most of your income protection cover, here are three things you need to know.
How much you’re covered for
Most income protection policies let you choose your sum insured – usually up to 70% of your salary before tax (excluding super contributions). But remember, the higher the sum insured, the more you’ll pay in premiums, so it’s important to think about how much you’ll really need.
For example, you may earn $10,000 per month but decide you would only need $5,000 to cover your living costs. This will significantly reduce the cost of your premiums.
To work out the right level of cover for you, start by considering all your everyday expenses. This might include things like rent or mortgage repayments, bills, groceries and school fees. You can also consider your occasional costs like your car registration and insurance.
All income protection insurance policies available today provide an indemnity type of cover. This means if you make a successful claim the monthly benefit you’ll receive is based on your income at the time of claim. Many older policies are still in place which provide a more generous agreed value type of cover. Make sure you discuss any existing cover you have with your financial adviser before thinking about changing it so that you understand the implications.
When you’ll start receiving benefits
All income protection policies have a waiting period: the number of days between your medical diagnosis and when you start receiving benefits. With most income protection policies, you can choose the waiting period – typically 30 days, 60 days or 90 days.
Because the first month’s benefit is generally paid 15 days after the waiting period ends, a 30-day waiting period means you’ll get your first payment 45 days after you first become sick or injured. The shorter your waiting period, the higher your premiums will be. For example, a policy with a 30-day waiting period is more expensive than a 60 or 90-day waiting period, because you start receiving benefits sooner.
Another thing to consider is that if you’re off work for fewer days than your waiting period, you won’t be eligible to make a claim. So, if you can’t work for 60 days, then a 30-day waiting period will give you one month’s payment. But with a 60 or 90-day waiting period, you’ll be back at work before you can claim any benefits.
That’s why you need to carefully weigh up how long you want your waiting period to be. If you have savings, or access to sick leave or annual leave from your employer, then it may suit you to choose a longer waiting period with lower premiums. But if you don’t have much in the bank or you’re a casual employee, you’ll likely need financial support quickly if you lose your income – even if it means paying higher premiums.
How long you’ll receive a benefit for
Your benefit period is the maximum amount of time you can receive payments from any claim. It varies depending on the income protection policy you have. When you take out cover, you can either choose a time period or the longest available benefit period, which is to the policy anniversary when you’re 65.
The benefit period can have a significant impact on the total amount you receive, particularly if you have a long-term disability and may never be able to return to work. For example, if you become disabled at age 50 and have a two-year benefit period, you’ll stop receiving payments at age 52. But if you select age 65 as your benefit period, you could continue receiving payments for another 13 years.
The benefit period only applies for as long as you’re disabled. If you go back to work before the end of the benefit period and start receiving some income again, most income protection policies will pay ‘partial disability benefits’. These are smaller benefit amounts which top-up the income you earn if you’re making a gradual return to full capacity. Your policy may also help you return to work quicker by covering the costs of rehabilitation or retraining expenses.
If you have a Zurich Ezicover income protection policy, then there is no partial disability benefit payable.
As with the waiting period, the benefit period can have a significant impact on the cost of your insurance. With a longer benefit period, you’ll pay a higher premium because you have the possibility of receiving income benefits over a longer period of time.