Shopping for the right income protection insurance
More and more people are becoming aware of the danger of leaving their income uninsured. People are generally well insured for their possessions, such as their car and their home, but they may neglect insuring the income that actually pays for those assets, and other lifestyle necessities, in the first place!
We offer a sobering example to illustrate this point. Consider a 40-year-old earning $50,000 today and expecting to retire at age 65. He or she would earn almost $2.4 million dollars during that 25 year period (assuming annual pay increases of 5%). This earning potential becomes the single biggest driver of that individual’s lifestyle choices, purchasing decisions, investment and retirement planning and standard of living. In order to protect these earnings potential, income protection needs to be a vital part of their financial planning.
Once the need has been accepted, however, it is then a matter of deciding on the right policy from an often bewildering range of products and benefits. We offer some key issues to consider when making a choice:
Definition of Disability
The definitions of Total Disability and Partial Disability dictate your ability to make a claim and are primary considerations when choosing income protection policies. These definitions are central to the insurer’s assessment of any claim, so it is important to understand how they work. There are significant variances in the definitions provided by insurers and their suitability and availability will depend on your individual circumstances, such as your occupation and income level.
‘Indemnity policies’ vs. ‘Agreed value’ policies
Income protection benefits are generally based around two methods of calculating your level of income. Indemnity policies generally provide a benefit based on your average monthly income in the 12 months prior to the claim. Agreed value policies provide a benefit based on a guaranteed income level, provided that your income at the time of application justifies the benefit cover. Indemnity policies are generally more economical and practical if you have a steady income and envisage that this will continue into the future. Agreed value policies may offer greater protection for those who are concerned their income could reduce in future.
While it is wise to compare prices on such policies, it is possible that the cheapest product today may be the most expensive in a year’s time. The merits of definitions and features also need to be considered to ensure that value for money remains paramount – not just price alone.
Income protection policies can provide an array of optional benefits and features. Examples of these may be paying for your return to Australia should you become disabled while overseas, a nursing care benefit, a rehabilitation expenses benefit, guaranteed payments for specific illnesses and injuries and many more.
We offer a word of caution when buying an income protection policy. Many people come to us with concerns about their income protection and often we find they are either paying too much for their policy or, even worse, they have a plan that is a lot more restrictive than they expected. However, with the right advice and analysis before taking out a policy, it may be possible to tailor your cover to best suit your needs. It pays to get the right advice from an insurance expert!