Income Protection Insurance is the most important insurance cover for most people to have as it covers your potential to earn an income. It is therefore disappointing to see so many insurance advisers and bank staff that don’t take the time or make the effort to recommend the best policy and instead take the easy option or option that pays them the highest commission.
The Key Policy Differences
When you want to compare Income Protection Policies and the premiums you need to ensure that you are comparing similar policies.
There are three main differences that an insurance adviser should consider and discuss with you when they compare policies:
- The policy type
- Wait period
- Benefit period
The Types Of Income Protection Insurance Policies
Most people do not realise that there are different types of Income Protection Insurance.
The two most common types of Income Cover are the indemnity value and the agreed value but there are also now a few insurance companies that offer a loss of earnings definition on their policies too.
The most common Income Protection Cover sold is an indemnity policy where the benefit that you are entitled to receive is calculated at the time you make a claim. The biggest problem with this style of policy is the number of people (including insurance brokers and bank staff) which have calculated the benefit incorrectly, which means at claim time you could get less than expected even though you have paid premiums based on a higher expected level of cover.
Most top insurance advisers will prefer the agreed value policies which are a little more time consuming initially, but avoids disappointment at claim time.
The best income protection insurance for most people is the Loss of Earnings policy. Again, your entitlement at claim time is agreed upon; however if you are receiving other income from business, investment or ACC then the way that your loss of income is calculated means you will often be entitled to a higher benefit amount.
Another option that some insurance advisers prefer is the Mortgage Protection Cover. These policies were designed to meet your regular mortgage repayments should you be unable to work and have no income offsets which means you receive the full insured benefit regardless of what other income you might receive. You need to be sure that you understand the policy well as there are some good Mortgage Protection Plans, and some that are hardly worth the paper they are written on.
In summary we would recommend:
1st Choice: Loss of Earnings
2nd = Choice: Agreed Value
2nd = Choice: Mortgage Protection (selected policies only)
3rd Choice: Indemnity
What About ACC?
It is important to understand the limitations with ACC.
ACC currently provides accident compensation only and therefore does not provide financial compensation for illness related disabilities. It is also not a contractual agreement (a policy) and can therefore easily be changed by any Government which creates long-term uncertainty.
These are the primary reasons that we recommend a quality Income Cover using private insurance.
What Wait Period Should You Have?
The wait period is the time that must pass before your Income Cover starts paying you a benefit. It works in the same way that an “excess” works with your car insurance and should match the amount of risk that you are prepared to cover yourself.
If you are asked what wait period should you have most people would select the shortest possible period.
Wait periods can be selected from the shortest being 2-weeks, to wait periods of up to 1-year or even 2-years. In the case of Income Protection Insurance the most common wait period selected is a 4-week wait, but if you are able to have a longer waiting period then your premiums can be significantly reduced.
If your largest expense is your mortgage then you may select a 13-week wait period as most banks are able to offer a mortgage holiday for the same 13-week or 3-month period should you be unable to work.
In a “perfect world” you would have the shortest wait period you could as you would then be more likely to make a claim for a short-term illness or a minor accident; however extending the wait period ensures that you retain the more important long-term protection while staying within a realistic budget.
Longer Benefit Period Preferred
The benefit period is the maximum amount of time that a policy will continue to pay an entitlement at claim time.
We all want to think that we will recover quickly from any illness or accident and in most cases we do.
Here are some examples of recovery times:
- Heart Valve Surgery – most people take 3 – 6 weeks off work but there is also a high chance that it may take you a lot longer. There is also a high risk of depression as a natural result of recovery from invasive surgery. Being an illness means heart valve surgery is not covered by ACC but you would get a limited payment from most Trauma Cover policies and also from the Progressive Care Cover. CLICK HERE to visit WedMD and read more…
- Cancer – there are many forms of cancer which have varying degrees of recovery and many side effects including a high chance of depression. Trauma Cover and Progressive Care Cover provide good insurance options for cancer that provide a lump-sum payment rather than based on the loss of income.
- Knee Replacement Surgery – following knee surgery you will be encouraged to start walking within a few days and generally allowed to leave hospital within 6-10 days. You will use a walking frame or crutches and able to drive within 4-6 weeks but it can take up to a year before you are able to kneel easily and have full use again. CLICK HERE to learn more. The restricted use can affect the ability to work differently depending on the type of work that you are involved in and while you could expect some financial assistance from ACC if it was caused by an injury, they often deem joint replacement as degenerative and therefore they would not accept a claim. If you have a pre-existing condition then it would be excluded on most Income Protection Insurance too.
- Depression – there are many reasons and degrees of depression and many people will tell you that you never recover from depression, but rather learn to manage it better. A major website predicts that 50% of people will recover within 6-months and 80% within 12-months which leaves a 20% chance that recovery will take over 1-year. CLICK HERE for more information.
Should You Expect Exclusions Or Loadings?
When people apply for Income Protection Insurance or Trauma Cover many people find that due to recent health issues, their weight, smoking status, or other lifestyle choices that the insurance companies might exclude certain conditions from being covered.
For example an insurer issuing an Income Protection policy to an individual with a history of back pain which specifically excludes any claims involving their back. Other examples might be where a mental illness exclusion is applied for a woman who had suffered post natal depression or a cancer exclusion where someone has recently had moles removed.
An exclusion is introduced as there is evidence that you pose a higher risk of having a claim or it is unknown if the condition has been successfully treated and therefore there is a high chance of a reoccurrence.
Sometimes an insurance company may opt for charging higher premiums (a loading) rather than an exclusion. This is generally the case with Life Cover as the insurance companies never want to have any argument on a death claim.
Exclusions and loadings are the insurance companies’ way of being able to offer you cover and in most cases your adviser will try to minimise these so that the offer is acceptable to you. The key thing that you need to ensure is that your adviser works with you to have these exclusions and loadings reviewed with the hope that they will be removed in time. If your adviser is not doing this then it is time for a new adviser.
So What Is The Best Income Protection Insurance?
The best Income Protection Insurance is a policy that has been set up to ensure that it is relevant to your situation and provides certainty at claim time.
Any insurance policy needs to be affordable and you need to understand the policy or you will not see value in it. It is your adviser’s job to ensure that you do understand what you are covered for and more importantly what you are not covered for so you know and can manage those risks.
A good insurance adviser will have a range of options available and be impartial when selecting the right policy for you. Many advisers tend to favour an insurance company rather than a policy and often for their own financial reasons. Bank staff often only have one option that they can offer you and little knowledge of the other options or the claims process and therefore are not really in a position to offer advice on insurance.
At Mortgage Link we “ensure” that you get the best Income Protection Insurance now, and we review this regularly to “ensure” that you always have the best policy too.
Insurance Valuations – Valuer, Quantity Surveyor, or take a punt?
Most of us have received those rather ominous thick envelopes from our insurer or broker. As we all know, the events in Christchurch have shaken up a rather complacent insurance industry, which have been underinsuring for years.
Most of us have received those rather ominous thick envelopes from our insurer or broker. As we all know, the events in Christchurch have shaken up a rather complacent insurance industry, which have been underinsuring for years. They have been offering full-replacement insurance, but underestimating the actual replacement cost of houses.
Their cost per square metre allowances had not matched the actual cost and complexity of houses being built, and they may have ignored other structures subject to damage, such as retaining walls.
So insurance companies have decided to pass the risk onto us, the homeowner. We now have to nominate a value for replacement, just like we nominate the value of our cars. They will still only pay out on the actual repair or replacement cost at the time of loss, but their pay-out will no longer exceed the nominated sum insured.
The options are for you to nominate a sum insured amount yourself, or retain the services of a property valuer or a quantity surveyor. Traditionally, property valuers have provided insurance certificates for the replacement cost of commercial buildings and high-end luxury homes. Quantity surveyors typically provide costing advice and services within the commercial area of construction.
Residential construction is an interesting area in that it is tackled in all manners of fashion; e.g. fully developed ‘spec-built’, design-build, negotiated contract, tender, or labour-only (quoted or charge-up) with or without site management, and subcontractors/materials procured by the owner often with assistance from a project manager or quantity surveyor. So getting up to date information on values can be a bit tricky.
There are no-cost options such as insurance company default values (be careful with these), online calculators, or you could talk to a friendly builder, but beware as it seems to be a human trait to underestimate the cost of construction, just as we underestimate travel times!
A recent Sunday Star Times article has reported banks’ experiences where around 90% of customers appear to be doing nothing and accepting the default amount. This is a worrying as it will likely leave numerous customers under-insured.
If your home is relatively standard, which covers the majority of our houses, then a property valuer is a good option. If it is on a steep site with high retaining walls, or the house is complex, architecturally designed, and/or high standards of finishes and fittings, then a quantity surveyor will be more detailed and may be a more re-assuring option. However both should theoretically arrive at the same sum insured amounts, but will have arrived at these through differing approaches.
Property valuers generally produce insurance valuations quickly and efficiently for a reasonable fee. Generally quantity surveyors can’t match this – why? Property valuers are used to turning around small jobs so have systems and databases to support this. Whereas quantity surveyors tend to work on a project basis where there is more time and a higher degree of definition and accuracy is required.
So once you’ve made your choice and received your valuation, if you still have a nagging doubt, then like most insurance covers, if you err on the high side the additional cost of cover is not great and may well be worth the peace of mind.
Prendos has a full team of property valuers and quantity surveyors willing and able to assist you. And if you’re in to saving money and taking a punt, then we wish you well.
Written by: Philip O’Sullivan
How much insurance cover do I need? What is the actual cost to rebuild my house?
Insurance companies are changing the way they offer insurance cover to homeowners. Most house insurance policies provided full replacement cover where a home was a write-off, in a house fire or earthquake for example.
Insurance companies are changing the way they offer insurance cover to homeowners. Most house insurance policies provided full replacement cover where a home was a write-off, in a house fire or earthquake for example. As result of the events in Christchurch, and the effective open ended liability that the insurers found they had, they are now essentially capping their exposure by agreeing a maximum amount they will pay out to a homeowner if the house is a total loss. This is known as total sum insured or agreed sum insured. This will limit the risk for an insurer but significantly increase the risk for a homeowner, as in the instance they are under insured they will not receive enough money to rebuild their home.
It is now up to homeowners to establish how much insurance cover they need and to work out how much it may cost to rebuild their home. A property’s CV or indeed market value has very little bearing on what it will actually cost to rebuild a home.
So how does a homeowner make sure they have adequate insurance cover?
Some insurance companies have provided on-line calculators in order to assist their customers in estimating this amount. However, many have found these to be too simplistic. We have seen cases where the value produced by this method greatly underestimates the actual real world costs of rebuilding a home. This was also demonstrated by the TVNZ Fair Go program on 29 May and on Campbell Live on 27 May 2013.
In order to truly establish an accurate amount to insure a house for, a homeowner needs to engage a quantity surveyor or skilled property valuer. At Prendos we have both. Prendos clients benefit from the knowledge of our in-house quantity surveying team combined with our experienced valuers, who have been providing this “sum Insured” service for over 25 years. It is critical that current market conditions and the effect on construction rates are considered in rebuild cost calculations. For example, as a result of the Canterbury earthquakes, availability of demolition contractors are currently limited leading to a marked increase in demolition costs in other areas of New Zealand.
Recognising a homeowner will have to bear the expense of establishing appropriate insurance cover, we offer a package that is not only accurate but cost-effective. In the Auckland and Wellington regions this will normally be carried out by our valuation team. In all other regions including, Tauranga, Hamilton and Christchurch this work is carried out by our Quantity Surveyors.
This involves a Valuer or Quantity Surveyor visiting the house where they will establish a rebuild cost by:
- Physically measuring relevant building elements
- Assessing the sites difficulty and access
- Establishing the quality, size and complexity of the building
- Considering ancillary buildings, fences, driveways etc.
- Gauging demolition costs
In addition they will evaluate:
- Current construction/demolition rates from our quantity surveyors
- Anticipated escalation of construction/demolition costs
- Professional fees, compliance and consent costs
On completion of the site visit and additional evaluation a Prendos Valuer will provide the homeowner with an Insurance Valuation Certificate (also known as a Residential Insurance Certificate). If a Prendos Registered Quantity Surveyor has carried out the work they will provide a Reinstatement Estimate for Insurance Purposes. The homeowner will then present either of these to their insurer in order to formalise the “sum insured”.
To find out more about Insurance Valuation Certificates / Residential Insurance Certificates or a Reinstatement Estimate for Insurance Purposes including the standard cost click here.
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