Income Protection - An Often Overlooked Insurance Option
The Age
Saturday April 10, 2004
While it might be considered straightforward, income insurance can vary to suit needs and budgets.
Your greatest financial asset is, most likely, your ability to earn an income. However, while the overwhelming majority of people insure their homes, their cars and their valuable possessions, few even consider income insurance. If you got sick or had an accident and were unable to work, how would you pay the mortgage, feed the family and generally have enough income to survive?
For some people the answer could be simple - they may have enough income-earning assets or savings to continue to support their needs; their superannuation may include salary continuance that pays an income while they are out of work due to illness or injury or, if they suffer a work-related injury or disease, they will be protected by WorkCover.
However, for many of us, if we don't work we have no income. When all else fails, you may be eligible for social security benefits - but will this be enough to meet your needs?
Income protection insurance pays you an amount of money, usually monthly, if you are unable to work because of sickness or injury. It can provide security. However, as with all insurance products, you need to consider whether you actually need it and, if you do, you need to ensure you get the right amount of cover at the right price.
Everyone who earns employment income should consider how best to protect it. The decision to have or not to have income protection insurance will depend on your financial situation now and what is likely in the future, your employment and remuneration conditions, your level of income-earning assets, your superannuation scheme and your occupation.
People who are self-employed, in particular, may be putting themselves at financial risk by not having income protection insurance. If you are the business and you are unable to work, what income is available to you?
If income protection insurance is for you, which policy should you choose? For example:
• Agreed-value policy or an indemnity policy? With an agreed-value policy, you prove your income up front and insure to receive a set amount. The advantage is that you know what you will receive, regardless of changes in your income. The disadvantage is that these policies cost more. With an indemnity policy, you are insured for what you say you earn, but if you make a claim you have to verify your income.
• A basic policy or pay for extras? The basic version will give you income payments only. Extras, at a price, include paying for nursing care or receiving payments immediately rather than waiting for weeks, months or even years before payment begins.
When you can claim will depend on how your policy defines ``inability to work". Some policies only allow you to claim if you can't perform your normal job; others allow you to claim if you are unable to perform important duties.
Ask about policy exclusions too. That is, when the insurer won't pay at all.
The premium you pay will be influenced by factors such as your age, gender, occupation and health.
While insurance premiums in all sectors seem to be on a continuous upwards spiral, you can minimise your premium by refining the cover you receive. You don't have to pay for the bells and whistles if you don't need them.
For example, the premium will reduce if you opt to receive payments three months after you stop earning instead of one month. You can also limit the period you are able to claim payments or limit payments for certain conditions.
Because there are so many income protection products with so many options, you should seek advice on the subject from a financial adviser. As with all insurances and financial products, income protection should be considered as part of an overall financial plan.
Marilyn Smith is a certified financial planner with Mercer Wealth Solutions.
© 2004 The Age