Why you should have income protection
Your future earnings are your major asset in life, so it is vital that you put a plan in place to protect these, says Graham Knight, certified financial planner at Alexander Forbes Financial Planning Consultants.
Income protection is a policy which pays you a regular monthly income for the remainder of your working life should you become sick or disabled and unable to work. It is capped at what you currently earn, and cover can only be extended to 75% of your gross salary – in other words, you will be covered for take-home pay, which will be a tax-free benefit.
Income protection, while more expensive than life insurance, is vital especially for younger people who still have many years of life expectancy ahead of them, together with bond repayments and possibly children’s education expenses. You need to be able to look after yourself financially.
There are two types of income protection required: temporary and permanent.
Temporary income protection covers the first two years, with a waiting period from seven days to six months. This cover would be paid out should you be hospitalised due to a car accident or having chemotherapy, and unable to work.
Once you have passed the two-year mark, permanent income protection kicks in, which pays you monthly until your retirement age, which is generally 65 years old. Some policies pay out up to 70 years, but this would depend on your quote. It all depends on your budget and the cover you want.
The cost of income protection depends on factors including your occupation, health, income, education, smoker status, and age.
You can also insure yourself against disability with a lump sum pay out, which is cheaper but has other drawbacks, and unless you are permanently disabled, you probably won’t receive a pay-out.
Ensure that your income protection is based on your specific occupation, so that you will get a pay-out if you can no longer continue to do your current job, rather than be expected to find work in another field.
To ensure that you are not over-insured, before taking out an income protection policy first check if you covered through your employer – then if there is a shortfall between what you are covered for at work and what you are earning, you can take out a separate policy. Benefits at a corporate are often based on your pensionable salary.
Any increases will result in a need to amend your cover, so review your cover annually with your financial adviser.