Income protection insurance will payout a certain percentage of your monthly income if you're unable to work whether as a result of an illness, temporary or partial disability or loss of employment that was not voluntary.
It may seem like yet another “what if” question however, the majority of households would be unable to pay their bills if they lost their primary source of income for more than a month. The ACC or, Accident Compensation Corporation may cover you should you be unable to work due to an accident however, if you fall ill or lose your job you’ll be unable to make any claims which will certainly put you and your family in a very difficult financial position. If you're claiming from ACC you may still be able to receive benefits from your income protection insurance policy provided that you're not claiming benefits for the same injury and you will likely be taxed on these benefits since its considered income.
Loss of Income Protection
Consider that all your bills from your mortgage, car and credit card bills to your grocery and electric bills will still have to paid on time every month and if you do not have an emergency or savings account to cover these expenses you’ll be left in a potentially disastrous position. This is exactly what income protection insurance is here to help you avoid – the loss of your monthly income when you're unable to continue working. The truth is that most people avoid having to think about what would happen if they were unable to work for an extended period of time and this is why they’re generally reluctant to look into income protection and life insurance policies. Unfortunately, people get sick, companies retrench employees and facing the very real possibility that these things could happen to you is the only way to ensure that you protect yourself and your family from the unexpected. Banks and other lenders will probably make it compulsory for you to take out home insurance because they want to ensure that they protect their own investment. In the same way many banks will require that anyone with a mortgage carry mortgage insurance. This should be at a minimum LMI or, Lenders Mortgage Insurance which essentially protects the bank or lender from you defaulting. If you do not take out your own mortgage insurance the bank or loan provider will probably add Lenders Mortgage Insurance to your monthly loan repayment. If you're purchasing your first home you can opt to take out income protection insurance as an alternative to mortgage insurance which is compulsory amongst many banks and lenders.
Maximum amount for income protection
You have to decide on how much cover would suit your specific needs however at a minimum payouts should be able to cover any immediate debts such as your rent, mortgage and car loans and other insurance policies in addition to your day-to-day living expenses like your electrical bill, groceries and telephone bills. You will continue to receive these benefits as long as you are unable to work however, cover is limited on the majority of plans to 24 months. If you select the maximum benefit term of 24 months you're premium will be higher than someone who chooses a maximum payment term of 12 or 6 months. To further reduce the monthly premiums that you will have to pay you can opt to select a plan with a longer waiting period. This waiting period is the time period that you will have to wait out before you receive the first benefit and this can be anything from 30 days after a claim has been approved to 12 weeks – in which case you're premiums will be a lot less. Finally the third decision you’ll have to make is to decide on the percentage of your income you’ll need to cover your most important expenses. When taking out income protection insurance you will be offered an agreed value or a indemnity value. Although the majority of policies are indemnity value policies which are, as previously mentioned, set to a percentage of your monthly income, self-employed individuals will have to opt for an agreed value.
If you select the maximum amount which is usually 75%, you’ll pay more than someone who opts for a lower percentage of their monthly income. You cannot insure any income received from rental properties or other forms of investment as all policies will limit to your “personal exertion” income. This is obviously a limit placed on policies since additional income received from passive income streams as you are likely to continue receiving this income regardless of whether you're able to work or not.
If you're serious about protecting your income than it would be beneficial to speak to an independent insurance broker who can do all the research on your behalf and advise you on which policies are the most affordable yet provide the same cover. You can also do some of your own research online to identify which providers are the most popular and trustworthy as well as compare rates after you provide some basic information. Since you're more likely to all ill as you get older your income protection insurance premiums will increase – even though you're likely to have less expensive as your home and car loans will likely be paid off. If you have a life insurance policy and are 60 years or older and have paid down the majority of your debts you may want to consider letting your life insurance policy go in exchange for income protection. You're also more likely to have an existing medical condition at such an age which will not be covered unless you agree to pay more to have this pre-existing condition included in your policy. You can have an active income protection insurance policy up until the age of 70. In addition, the insurer will likely require you to give them consent to check your medical history as a way to minimize their risk. If you're not interested in taking out income protection insurance it is important that you set up a dedicated savings account or emergency fund that will be able to cover all of your monthly expenses for at least six months. You can start out small and keep increasing the contributions you make to this account as time passes until you reach your goal. Its also important to regularly update your policy to account for any additional financial obligations, age and even once you’ve paid off some of your larger debts. You should also adjust your emergency fund to account for these things too although it’s advisable to keep the balance as high as possible even when your financial situation improves.
