Most of us know the importance of insuring our houses, contents, cars and even our health. But surprisingly, many of us don’t place that same value on what is arguably our greatest asset – our ability to earn an income.
That's where income protection cover comes in. If you are unable to work for an extended period of time income protection provides a steady stream of income. It’s not the same as ACC. ACC covers you for accidents (such as broken legs or sporting injuries) but income protection covers you for any accident or illness (such as pneumonia and things like stress).
Income protection doesn't cover your total income; instead there are three options:
Agreed Value Contract – this provides cover for an agreed proportion of your income. Your premiums are not tax-deductible and you won't have to pay tax on the benefit you receive at claim time.
Indemnity Contract – this provides cover for 75 percent of your income. Your premiums are tax-deductible and you will need to pay tax on the income you receive at claim time.
Loan / Mortgage Repayment Contract – this is an agreed value contract based on your actual loan repayments. Your premiums are not tax-deductible and you won't have to pay tax on the benefit you receive at claim time. The biggest benefit with these contracts is that there is no offset with ACC. So, if you were off work due to an accident your loan repayment would kick in and if eligible you would also receive ACC.
The main difference between agreed value and indemnity contracts is the certainty of outcome at claim time. With an agreed value or loan repayment contract all the financial underwriting is done upfront when you take the cover out. With an indemnity contract your income is proven at claim time, which is not ideal if you’ve had a bad financial year or your financial information is not readily available. In many cases a combination of agreed value income protection and agreed value loan repayment cover is the optimum way to ensure certainty come claim time.
How to make the wait period work for you
The wait period is the time you have to wait before you receive income protection payments. Ask yourself, if you got sick tomorrow and needed six months off work, how quickly would you need money to start coming in? Now consider your wait period. While there is usually a minimum one-month wait period, you can select how long you’d like the wait period to be. Your wait period has a big impact on how much you pay in premiums. The shorter the wait period, the higher the premium.
How long do you need cover for?
Most income protection policies give you a choice of a fixed term of one, two or five years, or income protection through to age 65 or 70. While short term cover is better than no cover it is not ideal, after all what would happen if you chose a five-year payment term, claimed at age 35 and could never work again? You’d have no income from age 40 onwards! Selecting cover until 65 or 70 will give you more options come claim time.
If Income Protection is on your ‘To Do’ list for 2018, then please get in touch - the sooner the better, so you can have peace-of-mind knowing you’ll be financially secure if the unthinkable happens.
Bridget can be contacted on 021 977 924 or at email@example.com. Nb. Bridget’s Disclosure Statement is available on request.