We all know the heartbreaking stories of those who find out the hard way that their home insurance has exclusions or restrictions that stop them being able to claim after a flood or fire. Often the root cause is that they tried to save a few dollars in premiums, not realising that in doing so they were buying inadequate of cover that left them dangerously exposed.
While home insurance tends to grab the headlines on this issue, the same problem can occur with income protection. The quality of cover and inclusions can make a huge difference when we actually come to depend on an income protection policy to replace income if we are sick or injured. When it’s your entire livelihood and a lifetime of income earning potential at stake, you don’t want to take chances.
To help make sure you have the right cover, here are a few tips on some of the benefits and options you should look out for.
Is the cover comprehensive?
The first aspect to consider with any income protection is the definition of what a “disability” is. This can vary markedly, so it is helpful to get professional guidance to help compare policy definitions.
Some cheaper policies, known as cancellable sickness and accident policies can leave you exposed if you make a claim, as the insurer has the discretion to cancel future cover if they feel the risk is too great. A more secure option is to make sure your income protection plan is “guaranteed renewable” so that cover cannot be cancelled, as long as premiums are kept up to date.
Another key aspect of the base policy is the benefit period. If you plan on earning income up to age 65 then you should seek cover that will pay benefits up to age 65 too. Some policies will only have a limited 2 year or 5 year maximum payment period. This may make premiums cheaper, but will leave you exposed on long term claims.
Look for standard inclusions on your base policy
Apart from the core income replacement benefit, some policies will have inbuilt inclusions that add real value to your cover in certain claim situations. Here are a few that you should look for:
- Specified injury benefits: If you suffer one of a range of specific injuries listed in the policy, your benefits will start being paid early with the standard “waiting period” being waived. Ideally it will pay such a benefit even if you are still earning income after the sickness or injury occurs.
- Rehabilitation benefits: A good quality income protection plan will provide extra benefits to cover the cost of rehabilitation programs or equipment that can help you get back to work sooner.
- Funeral benefits: It may not be a pleasant subject, but if you ultimately die while on claim, some plans will pay out a multiple number of months cover as a lump sum death benefit to assist the family.
- Nursing or bed confinement benefits: Some sicknesses and injuries will leave you bed ridden and dependent on nursing care. A good policy will recognise the additional seriousness of such an event by waiving the waiting period and paying you benefits straight away.
- Inflation protection: As the cost of living rises, your insurance coverage should keep pace, so look for a plan that has inbuilt indexation that will automatically increase your cover amount every year in line with inflation.
- Waiver of premium: The last thing you want to have to pay if you are on claim is the premium on the very cover that is protecting your income. A waiver of premium benefit will ensure that premiums are not required while you are receiving income benefits.
- Recurrent disability: The reality of many medical conditions is that they can recur within a short space of time. To recognise this, your policy should have adequate recurrent disability provisions so that no waiting period is needed if your condition recurs within a 12 month period of your initial claim.
Having the best available cover can give you peace of mind
Optional extras that can add real value
Many policies will offer optional extra benefits for a small extra cost. These can often represent great value, so discuss the suitability for your situation with a qualified financial adviser. These benefits can include:
- Increasing claims benefits: Increasing your cover amount in line with inflation is important when you are not on claim, but perhaps even more vital when you are on claim. To ensure you have the latter, you may need to add an optional increasing claim benefit to your plan.
- Super contributions: While income protection plans will normally pay you 75% of your gross income, this may not be sufficient to allow you to continue your super contributions. An optional super contribution benefit will ensure this is paid as an additional amount to keep your super on track while you are down and out.
- Business expenses: If you are running a business it is not only your personal income at risk. Your business may have fixed expenses that need to be paid whether you are working in the business or not. A business expense option can give specific extra benefits to fund these costs, so that you don’t have to fund them from your income payments. This can help your business stay afloat until you are able to return to it.
- Home maker benefits: Income protection is usually only accessible to those earning income. This means those who choose to stay home and raise a family are not able to obtain cover. To help alleviate this situation, some policies will provide an optional benefit which will pay a limited form of benefit to a stay-at-home spouse who becomes sick or injured.
- Trauma benefits: Certain traumatic illnesses such as heart attack can pose real challenges in recovery and lifestyle adjustment. Good quality income protection policies will have an option to add a trauma benefit, which pays extra cash if you suffer one of a range of specified medical conditions.
Getting advice to avoid confusion
The complexity of income protection makes it advisable to get some professional help in determining which type of cover will suit you best and which options you should be looking to include. An adviser can also help shop around for the most economical cover solution too.
What optional extras do you believe are essential for a sound income protection plan? Let us know in the comments section below.