Pakenham, Cranbourne & Beaconsfield
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If an injury or illness forced you to take time off work, could you still keep up with your bills, mortgage repayments?
Learn more about income protection.
Will the bills stop if you have an accident or are too sick to work?
What if your sick leave runs out before you recover. What if the accident happens outside work and there is no Workcover.
What if you’re self employed and have no employer support?
A 35 year old earning $60,000 pa has earning potential worth $1,800,000 until age 65 (and that’s ignoring pay rises and inflation). Is that more valuable than their car? Have you insured your car but not your income?
Income Protection insurance (INCOME PROTECTION) provides a monthly payment to the insured person to replace lost income due to the inability to work as a result of illness or injury.
Definition of Disability
This area is evolving as insurers vie to outdo each other. Disability is simply being unable to work however some policy definitions talk about major duties of your occupation and there are policies allowing the insured to claim a full benefit even if they are fit for partial employment but work less than 10 hours per week under medical advice.
This definition is particularly relevant to business owners who are more likely to be keen to get back to work, even to the detriment of their health. 10 hours per week would permit them to keep a hand on the rudder while continuing to claim.
Each claim event is subject to a waiting period which is selected by the insured when setting up the policy.
Waiting periods are generally 14, 30, 60, 90, 180 days, 1 year or 2 years.
The longer the waiting period the cheaper the premium. The adviser should assist the client balance the amount of other financial resources (e.g. sick or annual leave) which can be used against the premium they can afford when selecting a waiting period.
It should be noted that INCOME PROTECTION contracts pay monthly in arrears which effectively adds 1 month to the selected waiting period.
Indemnity or Agreed Value Income Protection
Indemnity policies require proof of income at time of claim. This gives the insurer the right to decide on the payment amount made based on the insured’s immediate pre disability earnings which may be lower than the sum insured. This issue is not generally critical for salaried employees with steady repeatable income but for the self employed or employees where commission or bonuses makes up a significant portion of their income it may be crucial
A normally successful business had a lean year and made a small loss. The owner was able to pay his generous salary from retained earnings, however when he fell ill and went to claim on his indemnity INCOME PROTECTION insurance the claims department deemed that he had no insurable earnings since his business made a loss the year before. The claim was denied.
An agreed value policy requires income to be proven at time of policy issue. The insurer must then pay out the agreed sum insured in the event of a future claim with no reference to the insured’s current earnings. This cover is more expensive but provides more certainty.
The insurance industry has a saying “it’s better to negotiate with an underwriter than a claims manager.” We follow that philosophy when advising our clients on INCOME PROTECTION insurance.
Entry Age/ Expiry
A new INCOME PROTECTION policy is normally available to persons between the ages of 16 to 60.
Cover is “guaranteed renewable”. Once the insurer has accepted the client they cannot cancel the cover unless the client stops paying premiums.
Premium level and acceptance are correlated to the specifics of the client’s occupational duties. Lower risk professionals may be able to obtain new cover up to age 65.
As long as premiums continue to be paid cover can stay in place until the insured’s 65th birthday or age 70 for some low risk occupations.
Level of cover
The maximum cover is 75% of earnings plus an allowance for compulsory superannuation contributions. Each insurer will put a ceiling on the maximum dollar figure they will cover and again this is related to occupational risk.
It could be $10,000 per month for more manual occupations reaching up to $30,000 for low risk professionals.
Length of Cover
Policies can be taken to pay the injured in the event of a valid claim until age 65 (standard) or earlier.
A policy designed to pay out for 2 years from the date of claim would reduce the premium cost and, in the event of a serious illness/injury causing permanent impairment, may provide an income source until a TPD claim can be finalised.
Premiums can either be stepped or level.
Stepped premiums increase annually on each policy anniversary as the insured gets older.
Level premiums remain constant (apart from increase in cover due to CPI) for the life of the policy until the insured reaches age 65. Most insurers have level premiums revert to stepped when the insured reaches age 65.
Level premiums are more expensive than stepped premiums. As stepped premiums increase each year there is a ‘crossover point’ where the stepped premium becomes more expensive than the level. This can be between 5 and 10 years and is client specific. Each client’s circumstances and needs must be considered when deciding between stepped and level premiums.
There are a range of optional benefits that can be included for the payment of additional premium. These include:-
Claims escalation which ensures monthly benefit is indexed each year for a long term claim.
Day one Accident cover which pays during the waiting period (up to 90 days) if the injury is due to an accident and disability lasts at least 30 days. This is an option particularly useful for self employed tradespeople.
Who is Income Protection Insurance appropriate for?
INCOME PROTECTION cover is essential for any person who depends on their ability to work to generate their income and depends on their own income to fund their cost of living.