Choose the right income protection plan

It won’t be news to you that your ability to earn an income is crucial, and for this reason income protection insurance is often the most important insurance that a person can have (along with health insurance it's the most likely 'personal' insurance that you'd need to make a claim on).

Consider these questions...

• How dependent on your income are you?
• Do you have sources of income other than your job?
• Who would support you if you couldn’t work?
• What would be the financial impact of this?
• Is anyone else dependent on your income?

Income protection can help you answer these questions with confidence. When you set up your plan you’ll have a number of options – we’ll look at these below.

How much to protect? The first thing to consider is how much of your income you’ll need to protect. This is the amount paid if you need to make a claim, and you can choose this percentage when the policy is set up. Usually this will be a maximum of either 55% or 75% of your before tax income.

Why 55% or 75%? In brief, the difference comes down to the kind of plan that is used – if you make a claim the 75% option pays a sum that is designed to be taxed, while the 55% payment is not designed to be taxed. In much the same way, the premiums for the 75% option are intended to be tax deductible, while the 55% premiums are not. Which is better will depend on your situation – and your adviser can outline the differences and make a recommendation for you.

How long to wait? Your income protection insurance payments won't start until after your ‘waiting period’ (also called a no pay period). You can choose the waiting period (though there is often a minimum of 1 month). A plan with a waiting period of 1 month will have much higher premiums than a plan with a waiting period of 3 months.

If you have savings that you could rely on if you were unable to work, or have extensive sick leave, then you might be able to extend your waiting period - lowering your premium. Also if you’re in a two income household then this will also have an impact on how long your waiting period needs to be.

Don’t forget that while a longer waiting period will save you money, it’s important to be realistic – a waiting period that is too long can lead to major financial problems if you can’t get by during that time without an income.

What length of cover? You will usually have a choice of how long your benefit (the money paid if you need to make a claim) will be paid for - there's often a choice of 2 years, 5 years, or till age 65. Simply put, if you choose a pay period of 5 years, and need to make a claim, you will receive payments for 5 years. After that the payments will stop - regardless of whether you're able to work or not. If you selected the "until 65" pay period, your payments would continue (as long as you're disabled of course) until you're 65.

Which plan to choose? Choosing the right income protection plan requires a certain level of expertise and experience. For example if you're self-employed with a fluctuating income the type of plan that suits you will probably be quite different from the plan that suits an employed person with a steady income.

Also, make sure you understand what your plan does and doesn't do. Different policies have different definitions (or policy wordings). For example, policies A and B might have quite different definitions of "disability" or "pre-disability income" - which could mean that plan A is harder to claim on than plan B. So keep in mind that premiums will vary depending on the quality of the plans you're looking at. Is a plan you're looking at only cheaper because it's harder to make a claim? It’s worth paying an extra couple of dollars a month to make sure you have cover that gives you decent protection. Your adviser can easily outline the important differences between plans.


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