Designing an Income Protection policy
If you’re working and haven’t yet reached the point of financial independence then income protection insurance should be on your radar. As the name implies, it can help you protect your greatest asset – your ability to earn an income.
I've had many clients who have needed to use this safety net. From broken knees (slipped on wet rocks at the beach), a torn Achilles tendon (playing touch football) through to cancer (prolonged treatment plan and a slow return to work) - you name it. Anywhere from 3 months to 12 months off work and they were all able still able to pay the bills, buy groceries, keep the kids in school etc. It was such a relief to them.
Income Protection is a practical and straightforward type of insurance and if I was to ask an insurance company to describe it - this is generally how they would say it works;
It's the promise to pay the policy owner a regular benefit, usually 75% of their normal income, if they are unable to work due to accident or illness. Payments are made after an agreed waiting period and continue until either the policy owner is able to return to work, or until the end of the agreed benefit period.
Core and supplementary benefits
In addition to the core benefit to pay you a replacement income, most income protection policies also offer a wide range of supplementary benefits. These vary from policy to policy, but would generally include:
Travel and accommodation costs, for example, to return you home if you are injured while overseas.
Specified injury benefits that pay an additional amount if you suffer things like broken bones, loss of sight, paralysis or other stated conditions.
Bed confinement or nursing benefits.
Elective surgery benefits.
Family support benefit or accommodation benefit, payable if a family member needs to travel from their usual place of residence to be with you.
Total and permanent disability benefit.
Adding supplementary benefits does add to the cost of cover, however, and the value of any supplementary benefit depends a lot on your individual circumstances. Someone with a good income, modest expenses and a partner who works may be able to easily meet costs such as childcare, even if their income drops to 75% of its usual amount. For someone on a tighter budget, then supplementary benefits may be a way of achieving greater cover at a reasonable cost.
Tailored cover for Kate
Supplementary benefits allow the cover to be adjusted to suit your individual needs. Consider the below strategy for Kate.
Kate is a 29-year-old software designer, she's single and lives alone. Her immediate family all live interstate and up until recently she regularly travels on holidays overseas. And she won't mind me saying that she hopes to be going on her European adventure soon :-)
As Kate doesn't have any children she doesn't see value in the childcare benefit. With no dependents, she also doesn’t require death cover. However, as she doesn't have any close family living near her, the family support benefit and bed confinement benefit really appeal to her. She loves to travel, so she selects the travel and accommodation benefit for that extra peace of mind.
The ability for me to select only the relevant supplementary benefits means that I can help Kate design an income protection solution that suits both her needs and her budget. Finding the balance between both these items is the key.
Income protection insurance is one of the very basics for a solid financial plan. Without an income - your plan can fail. If you can keep your income coming in, even if your unable to work, then your plan can still succeed. And having that safety net in place means that you can walk forward with confidence.
Shaun O'Keefe is a fee-based financial planner serving the families of the Peregian community to help set themselves up to build and successfully transfer their wealth between the generations. While some advisers focus specifically on investments or retirement planning, he's chosen to focus 'Financial planning for the whole family’. Subscribe
The information contained in this article is general in nature only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision concerning a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.