Income Protection Options
Out of all the different forms of personal insurance available, income protection is the one with the widest variety of options.
When taking out income protection insurance there are number of options which must be considered. These aren’t optional extras, but instead are necessary options which can have a major impact on your premium and your ability to make a claim.
In this guide we will take a look at some of the most important options which must be decided upon when taking out a new policy.
The waiting period relates to the period of time you must be unable to work for before you will be able to make a claim on your policy.
Waiting periods range from fourteen days through to two years, with the most common waiting period being thirty days. A longer waiting period will result in a lower premium, but it will also lower your chances of being able to claim on the policy.
If you choose a waiting period that is too long, you may run out of money before you start receiving benefits from your income protection policy.
The length of time which you will continue to receive monthly benefits for is known as the benefit period.
Benefit periods generally include two and five year options, along with an option that runs through to age 65 rather than a set number of years. In some cases an age 70 option may also be available.
A shorter benefit period will result in a lower premium, however this could leave you exposed if your benefit period runs out before you are well enough to return to work.
Most income protection policies will cover up to 75% of your income, and in some cases you may be able to stretch this out to 80% depending on the insurer.
Whilst most policyholders opt for the 75% coverage, you can choose to insure yourself for less if you wish.
There are two types of benefit you can choose with an income protection policy. The two options are known as ‘agreed value’ and ‘indemnity value’.
With an agreed value policy, the insurance company will agree upfront to insure you for a fixed dollar amount. Either at the time of application or time of claim you will have to provide evidence of the income which you declared on the application.
With an indemnity value policy you will still be insured for a fixed dollar amount, however if your income is lower at the time of claim you will only be paid 75% of your income at that time.
An agreed value policy does provide more security, however the premium payable will be higher. The indemnity option can be a good one for newly self-employed people who cannot yet prove their income.
As with all forms of life insurance, an income protection policy can be paid with a level premium or a stepped premium.
A stepped premium will increase each year as you get older, whilst a level premium will not change as you get older. The level premium will start off higher however, and it can take quite a few years before you benefit from the level premium.
Your insurance adviser will be able to show you the differences between the two premiums, and should be able to show you a projection of how long it will take to benefit from the level premium.
Choosing Your Options
Getting your options right is vitally important due to the impact they can have on your ability to make a claim.
You could choose a long waiting period, short benefit period and low benefit amount in order to get the lowest premium, however this will be of little use if it’s not going to meet your needs in the event of a claim.
It is important to choose the options that are going to meet your needs and objectives, rather than choosing options based purely on how they affect the cost of the insurance.
This article is about income protection insurance and is general information only. It should not however be treated as factual, as personal advice or be the basis of purchasing any insurance policy. Before deciding on an insurance policy read the PDS carefully and talk to a licensed insurance agent if you need further assistance. MoneyBuddy does not recommend insurance products or provide personal advice in regards to insurance products.