Is your Income Protection Policy Road Worthy?
Your ability to earn income is your most important asset, so having a plan in place when you are forced off the track and require a tune up from your mechanic is vital – an income protection (IP) policy can assist to smooth out the bumps in the road ahead. Not all IP cover is created equally and there can be many moving parts required to act in sync for peak performance, below are 8 to consider!
Comprehensiveness
- Does your policy have a 3 tier definition of totally disabled? Is there a Waiting Period requirement to be totally disabled for a certainty period of time in order to be eligible for a payment?
- A comprehensive policy will have a 3 tier definition of total disablement – Time, Income or Duties based. They also shouldn’t have a Waiting Period requirement for the life insured to be totally disabled for a specific time during the Waiting Period.
Waiting period (WP)
- What is your Waiting Period? Typically any period of 30 days of fewer will add significant cost to your policy premium so perhaps consider a longer Waiting Period if your personal reserves will allow you so.
- On the flipside, if you have substantial financial obligations (i.e. loan repayments) that are on short term recurring payment cycles, it may be worth matching your Waiting Period to their frequency.
Benefit Period (BP)
- Do you know your Benefit Period? The Benefit Period can range from a couple to several years, 2 or 5 years or a specific age date, to age 65 or even 75.
- Typically if you are off work due to illness or injury for a period of 60 consecutive days or longer, the likelihood of you returning to the workforce is less than a 50:50 chance. Therefore if you have a 2 or 5 year Benefit Period what is your plan post this timeframe? If you don’t have other means of support you may be left financially vulnerable.
Benefit Amount
- Are you maximising your Benefit amount? Or perhaps you only need to secure a portion of your income to meet your lifestyle and financial obligations.
- Generally you can insure up to 75% of your personal exertion income (salary and wages) including super payments (SGC and/or salary sacrifice).
Cover Type (Agreed vs Indemnity)
- Is your policy an Agreed or Indemnity contract?
- Agreed cover provides piece of mind around certainty of benefit payment at time of claim. This is done by providing supporting material such as tax returns, employment contacts or other means at application stage to back up the cover amount taken out.
- An Indemnity policy places the emphasis on the life insured to provide proof (financial evidence) at claim time to support the benefit payment. The life company will pay you the lesser of the benefit amount or an amount you are able to support. These types of policies are cheaper due to their lack of certainty.
Premium Structure
- Is your policy stepped or level?
- Stepped premiums are more suited to a short term requirement. They start out comparatively cheaper but increase year on year (approx. 10-15%) as the life insured ages, reflecting an increased risk to the life company.
- Level cover is more appropriate for longer term needs. They are not fixed but should remain consistent (outside of a repricing of the book by the life company or indexation of the benefit amount) over the life of the policy. They are comparatively more expensive in the initial years but will be cheaper over the long term.
- Usually, income protection is for a long term purpose (securing income over your working life) therefore, a level premium structure will tend to be more appropriate (cost wise).
Ownership Structure
- How is your policy held – personally or through super?
- Holding an IP policy through super can lead to issues such as access (need to not only meet the terms and conditions of the policy but a condition of release from super. Where the two requirements don’t match, the benefits can be quarantined in the super environment) and certain of benefits (unable to attain Agreed cover through super)
- If the policy is held personally, payments will be made directly to the policy holder, Agreed cover is able to be taken out and a tax deduction for the premiums paid can be claimed, potentially making the after tax cost of the policy significantly cheaper.
Claims Indexing
- Is your benefit amount indexed if you were to go on claim? Claims indexing allows you to keep pace with inflation over time. A restrictive policy will lock your benefit amount at commencement of the claims period thus reducing your purchasing power each year you remain on claim.
- Normally this is add on feature (at an additional cost to the policy holder) that you need to apply for (i.e. not built into the policy).
If you would like to review your current Income protection policy or discuss attaining cover (Income protection or lump sum), please contact one of our Financial Specialists today for a complimentary initial consultation. Alternatively, you can complete your details below and we’ll be in touch or give us a call on (03) 9835 8200.
DISCLAIMER: GENERAL ADVICE ONLY
The information provided in this blog is general in nature. It has been prepared without taking into account any person’s individual objectives, financial situation or needs.
Before acting on any information in this blog, you should consider its appropriateness to you, having regard to your objectives, financial situation and needs or seek professional advice from a financial advisor.
Accru are not recommending any investment or product, the investments mentioned are examples only. Please seek professional advice or do you own research for an appropriate investment.
