You might have heard people talk about income protection insurance, and wondered exactly what it is, and whether it is something you need in your financial toolkit.
So, here are a few things to consider when you are deciding whether income protection is right for you.
What is income protection for?
Income protection is designed to step in when you are off work and unable to earn your normal income. Unlike ACC, which only covers accidents, income protection can also help if you are off work due to illness. For many people, their income is their biggest asset, so income protection can be a way to ensure that is not lost.
What is excluded?
When you apply for your policy, your insurer will assess your current health situation. If you have any pre-existing conditions that could require time off work in future, you may find that your policy does not cover them. As advisers, we can explain the exclusions relevant to any policy you are considering.
Also, keep in mind that income protection policies are usually “offset” against ACC payments, although some “mortgage and rent”-style policies are paid alongside ACC payments, so you can claim if you are injured as well as ill.
How much is covered?
There are two main ways to determine how much cover you will receive. People usually choose between indemnity cover – where you are insured for up to 75 per cent of your gross pre-disability income – and agreed value. The agreed value is usually 62.5 per cent of your income at the time you applied.
The benefit of agreed value is that you are not faced with trying to prove your income at a time when you are unwell and potentially under stress. This can be an extra hurdle for people who are self-employed.
We can help you work out which option may be most appropriate. Keep in mind that, if you have a rainy-day fund in place, a lower level of income protection can help you reduce your premium – allowing you to save even more in your emergency fund.
How long can you wait to be paid?
Your income protection policy won’t start paying immediately. Depending on what you agree with the insurer when you take out the policy, your stand-down period can be anything from 30 days to two years. You can alter this as you like but the longer the wait period, the lower the premiums you will have to pay.
This will require you to think about how long you could actually cope without your income. If you have a good buffer in place, or can rely on your partner’s income, you might not find the prospect of being without one salary for a short while too daunting. But if you have a house with quite a large mortgage, your budget could be much more stretched. To work out what’s achievable, it could be a good idea to look at what you normally spend in a month and think about how much of that could go on hold.
How long will the policy pay you for?
Another thing you’ll need to think about is how long you’d like to receive the income protection payment for. People can choose between a set term such as two or five years, or opt for a policy that will pay until they are 65 or 70.
Policies that pay until retirement age tend to be more expensive, but you’ll need to weigh that up against the probability of not being able to return to your job after a serious health condition. A shorter payment term may also be appropriate, if that’s long enough to receive training for another more suitable job. Once again, it depends on your unique circumstances.
Like to talk?
There’s a lot to think about when it comes to protecting your income. But getting it right is really important to ensure that you are able to maintain your standard of living if you’re unable to work. We can talk through any questions you might have.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
