Do you need another Income protection insurance policy?

Income protection insurance is a type of life insurance that provides an income if you're unable to work. It's often overlooked, because being out of work is not the cheeriest thing to think about. The insurance payment kicks in after a certain period and covers a portion of your income. And, like many things in life, it's not as simple as it sounds.

There are two main types:

Agreed-value insurance, the most expensive option pays out a benefit agreed to reflect your income at the start of the policy. This type's not affected by any fluctuations in income - kind of like 'agreed value' car insurance cover, rather than market value.

Indemnity value policies are cheaper and more common. These verify your income at the time of making a claim and may adjust your benefit accordingly. So your payout salary can depend on things like maternity leave, working part time or becoming unemployed.

Indemnity value policies provided by super funds are the cheapest, with fewer features and less flexibility. They may also be limited to a shorter time period.

How long does it last?

This depends on how much you want to cough up for better contract terms. The more you pay for the insurance, the longer they'll pay you in the case of illness or injury. Policy terms range widely, from two to five years, or up to age 60 or 65.

Do I need income insurance?

It depends. Income protection policies are designed to meet the costs of 'living', rather than ensuring family members receive a payout after your death. If you're young and single with no dependents and limited fixed expenses, income insurance is useful. If you're a family type who needs to look after loved ones, life insurance may be a better bet.

So how much cover do I need?

Here you'll need to do some homework. Income protection covers roughly 75% of your income if you're sick, injured or unable to work. To get the best cover you'll need to budget your standard costs - like monthly mortgage or car loan payments – along with any dependents you want to provide for, plus the cost of managing any investment assets. This will help you decide what level of cover you need.

How much will it cost me?

Shop around and compare cover and prices - they differ greatly. Premiums are set depending on:

• age (premiums may increase or cover may decrease as you get older)
• gender
• health and pre-existing conditions
• whether or not you smoke
• occupation (for example, a manual laborer pays different premiums to an office worker)
• the time you choose to wait before receiving payment

Stepped or level income protection insurance premium… say what!?

The fun doesn't end there. Now we'll talk about different types of premiums.

• A stepped premium starts out cheaper, but increases over time.
• Level premiums are constant but vary depending on age at entry. They start out more expensive, but after 10 to 12 years of cover they're the cheaper option.
• If you plan on sticking with the same provider, a level premium is better in the long term.
• If you like to shop around, a stepped premium is wiser.

The tips and traps of income protection insurance

This isn't an exhaustive list. Before committing to a policy you should compare product disclosure statements. You might also consider getting professional financial advice.

• When taking out a policy, ask these key questions: What's covered? What's not covered? How much will I be paid after a claim? What will the insurance premiums cost now and later?
• Consider getting a policy with index-linked premiums and cover so you know it will keep up with inflation.
• Consider a non-cancellable policy, otherwise companies may reassess your health or other factors on each renewal, possibly raising your premiums or refusing to continue cover.
• Look for a policy with Guaranteed Future Insurability, a benefit that allows you to increase your level of cover without further underwriting. This is important if your circumstances change due to things like buying a home or having a child.
• Offset clauses allow insurers to reduce payouts if you have other income (for example, sick pay or Centrelink benefits). Check the relevant section of the policy for details.
• With group insurance provided through super: the agreement is between the fund trustee and insurer. This may make the claim and payout less straightforward. Check the waiting period (how long before you receive payment, often 30 or 90 days) and the benefit period (for how long payments will be made — typically two years or sometimes until your normally expected retirement age).
• Some policies pay out if you're unable to perform your normal occupation. Others only pay if you can't perform any occupation for which you're suited by education, training or experience. Look out for policies that pay if you're unable to perform your regular occupation.

Watch those terms

When taking out any insurance policy, you should check carefully the terms and conditions. You should also check the way the key terms of the policy are defined.

Nick, a farmer from Gloucester, found this out the hard way:

Nick had an income insurance policy with a large insurer. The policy was fine, but Nick had a not-so-typical income situation, because the money he made varied depending upon the success of the farm each year.

When Nick had an incident, the company refused his claim because they had defined his assessable income as being based on his taxable income. Sadly for the year in question, Nick had no taxable income. Instead, his income that year came from a legitimate repayment of money he'd lent to the family company in previous years.

Nick had seen no mention of 'taxable income' being the basis of assessing the insured's income. Luckily he was able to use an independent claims assessor to help negotiate with the insurer and eventually reach a compromise.

• Our tip: It's important to read all the terms to make sure you're not caught out at a tough time.

Read More

Know about illness insurance

What is illness insurance?

Illness insurance protects your income if you are unable to work because of an accident, long-term ill health or disability.There are several different kinds of illness insurance. Some pay out a single lump sum, some will pay out a regular monthly income, while others will cover payments for specific things, such as your mortgage or credit card payments.
On this page we explain why you might want to think about taking out illness insurance. You can find  out about the  different types of illness insurance available, some of the benefits they provide and what you need to think about before taking out one of these types of policy

Why take out illness insurance

If you can’t work because of illness, accident or a disability, you may be able to get state benefits or sick pay from your employer if you’re unable to work. However, these may not cover all your needs.
You might find relying on state benefits or sick pay alone would leave you with a much lower standard of living than you are currently used to.  You might also find that you don’t have enough money to pay off any  loans you may have taken out or to keep up the re-payments on your mortgage. You  could find yourself falling into debt and  could lose your home, be taken to court by people you owe money to or even be made bankrupt.
Even if you can get state benefits or sick pay from your employer,  it might be worth thinking about taking out one or more of the types of illness insurance as well, to boost your income. However, most types of illness insurance do have drawbacks and limitations which you need to look out for.

State benefits

State benefits such as Statutory Sick Pay (SSP) and Employment and Support Allowance (ESA) pay a very low rate of income. There are other restrictions too. SSP only pays out for a limited period of time, while for ESA you may have to undergo regular medical assessments and it can be stopped if you don’t pass them.
It’s worth checking how much money you would get if you had to rely only on state benefits and comparing this with how much you think  you would need to live on.

To get an estimate of how much benefit you might get, use the Benefits Adviser on the Directgov website at: www.direct.gov.uk.

Employer’s sick pay and pension

Your employer may pay you Contractual Sick Pay. This is also called enhanced sick pay and it means that you would get all or part of your regular salary for a set period of time if you can’t work. Contractual Sick Pay can be paid at a lower rate than your normal pay.
Some firms will also pay your pension early if you have to retire early through ill-health, although the amount you get might be less than if you had worked to retirement.
If you’re not sure about what benefits you’re entitled to from your employer if you are unable to work through ill-health, you should ask them for details.

Self-employed people

Illness insurance can sometimes be a good option if you’re self-employed. This is because you can’t get pay from an employer and there are some state benefits you won’t be able to get either such as Statutory Sick Pay. However, there are some types of illness insurance you may not be able to get if you’re self-employed, so you will need to check policies very carefully before you take one out

Types of illness insurance

Here are some of the main types of illness insurance available. For more detailed information about  these types of insurance

Critical illness insurance

This is a kind of illness insurance that pays out a lump sum if you are diagnosed as having a specific illness such as cancer or heart attack. If you have a mortgage you may have been sold critical illness cover when you took out your loan. This is not the same as mortgage payment protection insurance.

Income protection insurance

This is also called permanent health insurance. This is another kind of illness insurance that would pay you an income for the rest of you life or until you reach retirement if you can’t work because of ill-health or disability. You usually have to wait a few weeks or months before payments start.

Payment Protection Insurance

This is a kind of insurance that you take out to cover mortgage, credit card, store card or personal loan payments if you can’t work because of ill health or are made unemployed. You may have to wait a few months before the payments start. They will only cover you for a limited period and usually stop after a certain amount of time.

Mortgage payment protection insurance

This is the same as payment protection insurance but will only cover your mortgage payments.

Read More