How does your income protection insurance stack up? Common issues with income protection policies include adequacy of the coverage and underinsurance. When was your income protection insurance last reviewed?
How to calculate your level of cover?
You can insure up to 75% of your monthly income. Refer to the below information for further details provided by one of our leading insurance companies.
Self-employed
Self-employed applicants are sole traders, partners, shareholders or employees of their own business, (eg Pty Ltd company, trust or partnership). Monthly earnings are based on the client’s share of the business profits they are entitled to and/or receive directly or otherwise. Business profits are calculated in the usual manner that profits and losses in a business are calculated.
Some items can be added back from the profit and loss such, as the client’s share of:
- donations;
- salary/wage and/or Director’s fees paid to the clients;
- superannuation paid to the clients;
- salary/wage and or superannuation income split with spouse;
- a percentage of private use of a motor vehicle, if not already taken into account; and
- depreciation costs if not already taken into account, depending on the item and the amount.
Speak to your adviser or broker to determine your level of cover and premium amounts. Benefit levels and policy conditions can be customised to suit your needs and budget.
Income Splitting
If a spouse is employed in the business primarily for income splitting or taxation purposes, benefits may be based on the income generated by the breadwinner. If you don’t factor this into your calculations and get approval from the insurer you could be grossly underinsured.
What is the best waiting period?
Every person’s needs are different. Most insurance companies offer a choice of waiting period before they start to pay claims. The longer the waiting period the cheaper the premium.
Income protection premiums are fully tax deductible, making them more affordable every year.
You may choose to take a longer waiting period if you have savings or other assets to call upon. Most businesses have invoices outstanding, this is for jobs that you have completed and are waiting to be paid. Whilst it is not advisable to rely on this, you may consider taking a longer waiting period to lower the cost of your premiums if premium affordability is a concern. This may not be appropriate for businesses which are seasonal. The waiting period means you are self-insuring for the period if you can’t work due to illness or injury.
Types of income protection cover and benefit periods.
The type of insurance will depend upon your occupation and duties. You can insure yourself for accident only cover or sickness & accident. It’s best to insure for sickness and accident as this covers you comprehensively.
Accident only cover have many exclusions to be aware of and are accordingly cheaper.
The benefit period can be for 12 months, 2 years, 5 years or to age 65/70. Some occupations may only qualify for a 2 or 5-year benefit level. The longer benefit period offers better income protection for more serious illnesses or accidents. If you don’t qualify for a longer benefit period then you may need to consider other insurances like Total & Permanent Disability to cover long term income protection needs.
There is also the choice of Agreed Value and Indemnity benefits. Not all sole traders or businesses qualify for Agreed Value cover.
Indemnity cover is cheaper because your benefit payment will be assessed at the time of claim and will most probably be based on your earnings over the last 12 months. Sometimes this may be lower than the benefit you have insured for if your earnings have reduced since taking out the insurance. This is very disappointing and should be avoided. You adviser or broker will be able to provide much needed guidance here.
Agreed Value cover means that the insurance company will guarantee the benefit level based on an average of two years tax returns and or company financials. Whilst this is slightly more expensive it offers greater certainty.
Income Protection is an important benefit as most people rely on their ability to work to generate an income. It’s best to discuss these points with your adviser and or broker to structure a package that best suits your needs.
Two premium types
Stepped or level premiums? Stepped premiums will increase each year as you get older. The older you are the more expensive the cover becomes. Based on claims experience the insurance companies believe more things can go wrong with your health as you get older.
Level premiums are more expensive than stepped premiums at the start. However, level premiums stay the same up to age 65 or 70 and offer considerable savings. Your adviser or broker can provide you with a projection to assist you in this area.
In summary, there are many options with income protection. Being better informed will assist you to structure a suitable policy and premium structure.
At Surety Life, we will discuss all the options and provide you with a comprehensive package that you can afford. We will also manage your claim with the insurance company.
The above information in not intended as advice, if you require advice please contact Surety Life.