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.