The Ins and Outs of Income Protection Insurance

What would happen if you got sick or injured tomorrow and couldn’t work?  How would your family pay the bills?

These are scary questions, but you can chase all of the fear away by purchasing income protection insurance!

If you’re covered by an income protection plan, you can get paid up to 75% of your salary until you can return to work.  The payments will be made once a month, so they’re spread out like a “real” salary.

It’s nice to have a safety net, but there are a few other things you need to know if you’re about to start comparing income protection plans

First, you need to understand that you won’t get any money until you get through your waiting period.  The average income protection policy will make you wait 30 days before your first check arrives.That can make things tough if you have bills that need to be paid right now.

Your income protection quote will come with the insurance company’s standard waiting period, but if you want to shorten it, you’re free to do so for a fee.  You’ll pay more in premiums, but the added expense may be well worth it.  After all, if you were to get injured out on your road bike and miss two weeks of work, and you had a 30-day waiting period, you wouldn’t get any money.  But if you’re waiting period was only a week, you’d get some money towards the end of your recovery.

Before you sign up for a short waiting period, keep in mind that income protection insurance only kicks in after you’ve gotten other benefits.  So, if you have two weeks’ worth of sick time, you won’t be able to tap into your insurance protection benefits until you’ve exhausted them.  Like any other form of insurance, income protection isn’t designed to put you in a BETTER financial position.  It’s simply supposed to help you break even if something goes wrong.

Even if you’ve already used up all of your other resources, you still may not qualify for your income protection benefits, because some policies state that you have to be completely disabled in order to get them, meaning you can’t do any kind of work, including part-time work.  Other policies, however, say you simply have to be unable to do the work you did before your illness or injury in order to get your money.  So, read the fine print before you opt for a particular policy.

So what if you’re entitled to your income protection benefits.  How much money do you actually get?

We’ve already mentioned that the average policy pays out 75% of your salary until you return to work.  However, your benefits may not be based on your current salary.  Some policies look at your income from the previous 12 months in order to calculate how much money you get.  If you just got a raise a month ago, it may not be included in the calculations.  That’s why it’s so important to find out how your insurance company will calculate things before you commit to a plan.

When it comes time to tell your insurance company how much you make, be sure to include everything, not just your base salary.  If you get overtime, add that into the equation.  The same goes for your car allowance and any other benefits you get.  Since they all count as “income”, they’ll all count towards your income protection payout.

Most income protection plans are built to withstand inflation , meaning that your benefits will automatically increase every year.

One final note is to take a close look at your policy’s “benefit payment term”.  If you’re ever disabled to the point where you can never work again, you’ll need to know how long your income protection benefits will be paid out.  Some policies will pay you until you turn 65, while others have a much shorter benefit payment term of 1-5 years.  Your income protection money will run out eventually, so it’s important to know when that will be.

Do you have income protection insurance?

This is a guest post

Photo by Bethany Van Buren

 

One comment

  1. You buy insurance for peace of mind, so you don't want to worry about whether your insurance company will drop dead before you do. Look for one with the very top financial-strength rating from an independent rating agency.We recommend you stick with the "A" ratings tier at FMA.

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