When you insure your most valuable assets, such as your house and car, you may be overlooking the most important of them all: your ability to earn an income. That’s where income protection can make all the difference. It pays out a regular benefit of up to 70% of your regular salary if you’re unable to work due to sickness or injury.
As well as providing peace of mind, income protection can be cost-effective. This is because your premiums are generally tax deductible if you hold your policy outside of your super – making it more affordable to get the cover you need.
To help you make the most of your income protection cover, here are three things you need to know.
How much you’re covered for
Most income protection policies let you choose your sum insured – usually up to 70% of your salary before tax (excluding super contributions). But remember, the higher the sum insured, the more you’ll pay in premiums, so it’s important to think about how much you’ll really need.
For example, you may earn $10,000 per month (and could apply for up to $7,000) but decide you would only need $5,000 to cover your living costs. This will reduce the cost of your premiums compared to what you would pay if you were covered for $7000.
To work out the right level of cover for you, start by making a list of all your everyday expenses. This might include things such as rent or mortgage repayments, bills and groceries. If you have a family or other dependants, list their extra costs, too, such as school fees, clothing, healthcare and entertainment. Then add in a buffer for occasional costs such as your car registration and insurance.
When you’ll start receiving benefits
All income protection policies have a waiting period: the number of days between your medical certification of you being unable to work and when you start receiving benefits. With most income protection policies, you can choose the waiting period – typically 30 days, or 90 days.
Each month’s benefit is paid in the next month. With most insurers, a 30-day waiting period means you’ll generally get your first payment 60 days after you first become sick or injured. The shorter your waiting period, the higher your premiums will be. For example, for the same sum insured a policy with a 30-day waiting period is more expensive than a 90-day waiting period, because you start receiving benefits sooner.
However, Zurich is unique. We make total disability payments only 15 days after the end of the waiting period. Better still, our premiums aren’t any more expensive because of this.
Another thing to consider is that if you’re off work for fewer days than your waiting period, you won’t be eligible to make a claim. So, if you can’t work for 90 days, then a 30-day waiting period will give you two month’s payment. But with a 90-day waiting period, you may bebe back at work before you can claim any benefits.
That’s why you need to carefully weigh up how long you want your waiting period to be. If you have savings, or access to sick or annual leave from your employer, then it may suit you to choose a longer waiting period meaning lower premiums. But if you don’t have much in the bank or you’re a casual employee, you’ll likely need financial support quickly if you lose your income – even if it means paying higher premiums.
How long you’ll receive a benefit for
Your benefit period is the maximum amount of time you can receive payments from any claim. It varies depending on the income protection policy you have. When you take out cover, you can either choose a time period or an age when you’ll no longer be eligible for income protection payments.
The benefit period can have a significant impact on the total amount you receive, particularly if you have a permanent disability and will be unable to return to work. For example, if you become disabled at age 50 and have a two-year benefit period, you’ll stop receiving payments at age 52. But if you select age 65 as your benefit period, you’ll continue receiving payments for another thirteen years.
The benefit period only applies for as long as you’re unable to work. If you go back to work full time or part time before the end of the benefit period, your payments will stop or reduce when you start receiving an income again.
As with the waiting period, the benefit period can have a significant impact on the cost of your insurance. With a longer benefit period, you’ll pay a higher premium because you have the possibility of receiving a much larger payout.
