Income ProtectionIncome Protection Cover is a monthly benefit designed to replace your income should you suffer a total or partial disability which leaves you to be unable to earn your normal income.
This type of insurance can also be known as Income Protection Insurance and Disability Income Protection, and other similar insurances which may be recommended in some circumstances include Mortgage Protection Cover which protects mortgage repayments and Key Person Cover or Business Continuity Cover which has been designed for self-employed and business owners.
Ask yourself these questions;
- How long are you able to survive without an income?
- How much of your income could you survive on?
- Would you be able to stay in your house if your income ceases tomorrow?
- Would you be able to stay in your house if your Income Protection Cover benefit stops in ‘say’ 2-years?
Most people need a regular income, and if their income ceases it would not take long before financial troubles hit.
Furthermore, we do not want to rely on charity or state assistance.
In New Zealand we are lucky to have ACC which may assist if an accident is determined as the cause of your inability to work, and if caused by an illness you could apply for a sickness benefit which is now known as a jobseeker support benefit. These state benefits are designed to offer support when needed, but there are many examples where people do not get what they had expected.
Private insurance is designed to provide certainty.
What Is Income Protection Cover?
Income Protection policies protect your largest asset (your ability to earn an income) by providing a replacement income should you suffer an injury or illness that results in a total or partial disability which leaves you to be unable to earn your normal income.
Most New Zealanders are reliant on their income and this is why most insurance advisers will say this is the most important insurance policy that you will ever have. It is therefore critical that you get the best policy and there is a lot of differences within the various policies that make having good advice crucial.
If you are self-employed you need to ensure that you have the right policy as many policies will not provide adequate protection for you at claim time.
Understanding Your Income Protection Insurance
People earn income in different ways and therefore you will find a range of different Income Protection Insurance policies designed to suit these different situations.
There are three common types of Income Protection Insurance policies which determine how your benefit is calculated;
The most commonly available Income Protection Cover uses the ‘indemnity’ definition which means at the time of applying for the insurance you select your income and therefore the amount of cover you require. It is then up to you at claim time to prove that you were earning the stated income and your claim will be assessed on your loss.
This is the most common type of policy because bank staff and many insurance brokers find it is the easiest to apply for, not because it is the best Income Protection Insurance cover.
Agreed Value Cover
An ‘agreed value’ definition simply means the insurance company agrees on the amount they will insure you for so that you are only paying for what you are covered for, and more importantly you have certainty at claim time.
Anyone who is self-employed or has income from multiple sources should consider the ‘agreed value’ definition, but there are good reasons that would suggest everyone should opt for a policy that offers certainty at claim time.
Loss of Earnings Cover
The ‘loss of earnings’ definition is often going to be the most appropriate Income Protection Insurance policy as it offers you the choice (at claim time) of how your loss of earnings is determined.
This can make a big difference if there is any ongoing income or entitlements (ACC etc) that may be available to you.
Your Mortgage Link adviser can explain all of the differences so you can make an informed decision and ensure that your Income Protection Cover will work for you should you ever need to make a claim.
In some cases Mortgage Protection Insurance may be more suitable; however many of these policies provide limited cover.
Options Within Your Income Protection Policy
Most Income Protection Policies can be tailored to suit your individual financial situation and budget.
The key choices within most policies include;
Amount of Cover – most policies now allow you to cover up to 75% of your income, but you need to determine how much of your income you need to insure.
Waiting Periods – this is like an excess and determines how long you need to be unable to work before you are eligible for a claim. The options are generally, 2-weeks, 4-weeks, 13-weeks, 26-week and 52-weeks with the cost of the cover increasing with the shorter wait periods.
Benefit Periods – this is how long you would be entitled to continue to receive a claim. The most common benefit periods are to age 65 or 70 which is the deemed retirement age; however if you want to reduce the cost of you insurance you can elect a 2-year or 5-year benefit period.
Booster Benefits – some policies allow you to boost your claim by 33% for the initial 3-months of a claim. This helps you adjust to a lower level of income and is especially important for long-term claims.
Dependent Relative Benefit – this will provide a monthly benefit should you need to give up work to provide a full-time care for a relative who can no longer take care of themselves.
Retirement Benefit Option – this will ensure that your KiwiSaver contributions continue to be made while you are on a claim and therefore unable to continue to fund your retirement savings.
There are a number of other benefits within the various policies that may determine which policy you select.
Please discuss the options with your Mortgage Link adviser.