Income protection - protect your largest asset

Posted by: ING Life on 23 March 2007

Is it your home? Perhaps a business? Surprisingly, in the majority of cases it will be your ability to earn an income.

Our income is our greatest asset, yet we often take it for granted. Given the likelihood that illness or injury can strike at any time, this is not a prudent attitude. While ACC will cover a large number of injury claims, it is increasingly limited in its extent, and will not cover sickness.

It makes sense to ensure that you are insured in exactly the same way you would insure any other asset. This type of insurance is called ‘income insurance’. It pays you a regular income in the event of sickness or accident, generally as a percentage of salary.

Surprisingly few working New Zealanders insure their income in any form. Historically, we have relied on ACC, together with the mistaken belief that a serious or prolonged illness will never strike us. Obviously, this is not the case, yet for some reason, we don’t view our income-earning ability as an asset – possibly because we have always been educated to view assets as ‘things’.

As an example, imagine you earn $60,000 per annum. Over a ten-year period, you will generate $600,000 before tax. If you ask yourself the question, “would I insure an asset worth $600,000?” the answer is almost certainly going to be “yes”.

In a nutshell…

Income insurance comes in a number of forms, and can also be called ‘disability insurance’, ‘salary continuance’, ‘sickness and accident’ or ‘income protection’. Despite the different names, they all share a number of features in common.

As with other types of insurance, you pay a regular premium. In return, if you are off work through injury or illness, the insurance company will pay you a regular income until you are able to resume work. If you are only able to take up part-time work, many policies will pay you a ‘partial’ benefit.

However, you cannot ‘double-dip’ by claiming on two policies. In addition, benefits may be reduced if you receive other insurance or compensation, such as ACC.

Policies vary!

The two main types of policy are ‘sickness and accident’ and ‘income protection’.

Sickness and accident policies are the more restrictive. They will pay out only for a maximum of two years, and are usually cancellable by the insurer. Premiums are not tax deductible: however, as a result, any benefit is not taxable.

Income protection policies, on the other hand, are generally guaranteed to be renewable and non-cancellable. They also have longer benefit periods available – up to 65 years of age. However, the premiums are generally much more expensive.

When comparing policies, it’s important to understand clearly on what grounds any payment will be made. Income policies can cause considerable confusion as to exactly what is covered, what is classed as ‘disability’, and when you would be expected to return to work. Some policies will pay you until you resume your normal occupation. Others, require you to take up any occupation for which you are reasonably suited by education, experience or training. Therefore, you could be required to take a job paying less, and not even in a field you necessarily enjoy or want to work in.

Generally, any payment will be limited to 75% of your pre-disability salary. This is to prevent what insurance companies call ‘malingering’.

Spoiled for choice

Income insurance can be confusing because of all the options available...

• How much do you want to be paid?
• How long do you want to wait between suffering the illness or accident and when your income payments commence? (This can make a big difference to your premiums)
• How long would you like any benefit to last?
• Do you want to receive a partial benefit if you make a partial recovery?

Furthermore, even if two people choose exactly the same waiting period, benefit period and amount of benefit, one policy may still pay more than another. The biggest determinant is your occupation. Generally, all jobs are grouped into four main occupational classes, and it’s not difficult to see why a truck driver would pay higher premiums than an office worker.

Your gender will also have an influence. Women pay more than men, reflecting the trends that show they make more claims. This is quite the opposite of life insurance, where men pay more than women because they have a greater chance of dying earlier.

Finally, most policies have a few additional features that you can ‘add on’ – for a cost. You may choose to have premiums waived should you be receiving a benefit, you can have the level of cover indexed to inflation, and you can have the amount of any benefit increased each year in line with inflation.

Thanks to ING Life for this article