Safeguard earning power
Sydney Morning Herald
Wednesday March 9, 2011
In part two of our guide to insurance, Harriet Alexander looks at how to protect your income. If ever there was a type of insurance where the devil lies in the fine print, income protection insurance is it. Many people peacefully believe their income is insured against incapacitating accidents, only to get a shock when the worst occurs. Policies are shot through with demons and ensuring your income really is protected, while minimising the cost of the premiums, is fraught. Here‚„s a dummy‚„s guide.WHAT IS IT?Income protection insurance covers a large part of your salary if you become unable to work because of an accident or illness. Most policies will cover up to 75 per cent of your salary. The managing director of the research company DEXX&R, Mark Kachor, says this is to ensure people have an incentive to return to work and do not claim to have a psychological injury that cannot be proved, for example, so they can live off their benefits. Some policies will offer about 85 per cent of your salary but the additional 10 per cent is paid into superannuation.HOW IS IT SET UP?Waiting periods Policies have a waiting period before they kick in, lasting from as little as 14 days to two years. The longer the waiting period the cheaper the premiums, so you need to work out how long you can survive without an income. The most common waiting period is four weeks.Policy length Most people will need an income benefit up to the age of 65, although some products will allow you to continue receiving the benefit until age 70. Policies bought through superannuation funds often last only two years, so they can be supplemented by privately bought insurance that starts after a two-year waiting period.Agreed value v indemnity policies The next step is to determine what constitutes 75 per cent of your income.Under an agreed-value policy, the value is determined according to your income when you took out the policy. If your income is subject to commissions or bonuses, you will need to provide evidence of your total remuneration.Indemnity policies cover your income immediately before the accident occurring and deem the benefit to be the lesser value between 75 per cent of that figure, or 75 per cent of your income at the time you took out insurance.So a self-employed person who had fallen upon lean times at the time of their accident would only be insured for 75 per cent of their reduced income. Indemnity policies are generally cheaper.If you take on a new job that includes bonuses or commissions and need to get a track record before you can convince the insurance companies that those amounts should be included in an agreed-value policy, some products will allow you to the take out indemnity insurance for two years and then switch without providing medical evidence. This is useful in case you develop a life-threatening condition in the interim.How are the premiums structured? They can be stepped, level or hybrid. Stepped premiums start low and increase each year with age, level premiums stay more or less the same over the life of policy, whilst hybrid offers a combination of stepped and level. With all three options the premiums will increase each year as the benefit amount increases with CPI. Adviser Roy Agranat of Centric Wealth says level premiums can be useful in managing long terms costs, as income protection can become very expensive for older ages.However, you would have to work out the total cost for indexed cover over the life of the policy to compare costs. Choosing a level premium option does lock you into that insurer and product, and the insurer reserves the right to review the premium rates that apply.WHAT SHOULD IT COVER?An adviser at Centric Wealth, Roy Agranat, says the three priorities, are to verify that the insurance covers your own occupation, that the benefit amount increases with inflation (as well as with CPI on claim) and that the policy is an agreed-value benefit.The first of these refers to the fact that some policies will only pay out if you are incapable of performing any similar, paid job.So a neurosurgeon whose injury prevents them from operating might be told to carry out another task in the medical industry if the policy states ‚œ‚œany occupation‚„‚„ as opposed to an ‚œ‚œown occupation‚„‚„ policy.It is common for policies to include an option to have the benefit indexed for inflation. Kachor recommends that younger workers in particular ensure their policies are indexed.‚œ‚œIf you‚„re 35 and unable to work for the next 30 years, inflation is really going to kick in down the road,‚„‚„ he says.WHAT OTHER OPTIONS ARE THERE?Many options can be built into policies, including accommodation, relocation or transportation if you suffer an accident away from home or an income for your spouse while you are in nursing care. Self-employed people might also want to include a 10-hour definition, which means you can still claim a benefit while working up to 10 hours a week. This might be useful if you occasionally need to go into the office to pick up mail or do administration without breaching the conditions of your policy.WHO SELLS IT?It is possible to buy income protection insurance privately through the insurer or through your super fund.If you buy income protection insurance privately it is tax deductible but not if you go through a super fund.The super funds usually offer a cheaper product, though it is very simple and usually only covers you for two years. It may also be rendered void if you leave your current employer.Kachor says it may be worth taking if it comes automatically with your employment.‚œ‚œIf you stick to a very basic, no-frills benefit then you‚„re probably not missing much inside super,‚„‚„ he says. ‚œ‚œ[But] you may have no control over how the benefit is set up. Your employer may set up the scheme with a set of rules and that‚„s great ‚€œ it becomes a low cost ‚€œ but it may be that you‚„ve got a plan with a 90-day wait.‚„‚„Disability or income protection? or both?Advisers recommend taking out income protection insurance even if you already have total and permanent disability protection under your life insurance policy.The circumstances under which you are able to claim TPD are extremely limited and you can generally only get the lump sum if you have been unable to work for six months. If you need an income in the meantime, income protection insurance will cover you.Roy Agranat, of Centric Wealth Advisers, says it‚„s ideal to have both benefits, as TPD can be used to retire debts such as a mortgage while the monthly benefit from income protection covers living expenses. But if you must choose, income protection insurance is more important. ‚œ‚œPeople insure their motor cars and their mobile phones, yet they don‚„t insure their income,‚„‚„ he says. ‚œ‚œTheir biggest asset is their ability to generate an income.‚„‚„
© 2011 Sydney Morning Herald