HOW TO BE SMART WITH INCOME PROTECTION COVER

10-Apr-2018

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. Your Prosper adviser can explain the various indemnity options and help you choose the best option for your needs. 

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 receive ACC also.

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 out the cover. 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. Some insurance companies pay income protection policies in advance, so if you have a one-month wait period and are off work for a month your policy will begin paying at the end of one month. Others pay in arrears, so if you have a one-month wait period and you're off work for a month, you won't receive payment until you've been off work for two months.

Your wait period has a big impact on how much you pay in premiums. The shorter the wait period, the higher the premium. Your Prosper adviser can help you choose the best wait period for you. 

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 onward! Selecting cover until 65 or 70 will give you more options come claim time. 

Whatever you do, don't put getting income protection cover on the back burner. Talk to us and help make securing that much needed certainty for the future easy.