Personalising your income protection cover

Protecting your income is important. After all, who could really get by if their income stopped overnight?

As the economy slows and organisations tighten their belts, I'm seeing an increase in people asking about income protection insurance – especially Wellington-based public servants. 

Income protection insurance protects you if you're unable to work due to illness or injury. Unfortunately, it doesn't cover you in case of redundancy. 

You can insure a percentage of your income (usually up to around two-thirds), and if a medical professional deems you're unable to work, you'll likely be eligible for a claim. 

Let's talk about how can you tailor the cover to get it just right for you, and ensure you're only paying for what you need. 

1) Choose your provider wisely
Not all income protection policies are made equal – in fact, in my opinion, it's the insurance area with the biggest variability between providers. Minor differences can have a major impact on how a claim rolls out, so taking the time to consider your priorities with an adviser is super important, so they can research and find the best-suited provider and products for you choose from. 

2) Get the right mix of products

This is where, unfortunately, things can get a little complicated. There are quite a few different types of income protection insurances:
Mortgage protection cover, which allows you to insure either 40% of your income or 115% (or there abouts) of your monthly mortgage repayments

• Agreed-value income protection cover, which provides you with certainty around how much you'll receive at claim time and isn't tax-deductible

• Indemnity income protection cover, which allows you to insure a higher percentage of your income and works out a little cheaper. This option is tax-deductible and how much you receive at claim time depends on how much you were earning at the time you stopped being able to work 

• Hybrid products (often called Loss of Earnings) which work as a mix of agreed-value and indemnity covers. 

Generally speaking, mortgage protection cover is often the most preferred as it often doesn't have ACC offsets – meaning that it'll pay out even if ACC is paying you, too. Due to the lower limits of cover available, we often 'top up' the cover with another income protection cover, to take the overall coverage to around that two-thirds of your income mark.

What's right for you likely won't be right for others, so understanding what you need in the event of a claim is very important. Together , we will work through a process to help determine the best mix of covers, to get the optimal outcome at claim time.

3) Pick a wait period that actually works

A wait period is the period of time you need to wait from the day you're deemed unable to work until the insurer starts paying your claim. Generally speaking, a wait period could be anything from 2 weeks to 2 years, and the shorter the wait period, the more pricey the cover is. Overwhelmingly the most popular wait period I see is 13 weeks, as it tends to strike the balance of affordability for most people, but that doesn't make it right for everyone. Could you afford to wait 13 weeks to be paid if your income was cut off tomorrow?

It's often possible to mix and match wait periods, so you can have some cover that kicks in before others, to ensure there's at least some money coming in.

4) Plan around your payout period 

A payout period is how long your claim will continue to be paid for. It'll either be until a medical professional deems you're able to go back to doing your job, or until your payout period ends. Generally you can choose between payout periods of 2 years, 5 years, or to age 65 or 70.

A longer payout period is a good idea when you're protecting yourself against long-term risks, such as, say, a 30-year mortgage, or providing for dependants. Shorter-term payout periods can work well when you want to give yourself enough time to recover and get over an illness or injury without financial pressures. The shorter the payout period, the lower the premiums.

The right payout period for you will depend on the risks you face and your plan for managing them.

5) Make it fit with your finances

It pays to understand your options and set your cover up with a premium structure that works well for you.

Many providers offer the option to choose between Stepped and Level-Term premiums.

Stepped premiums are premiums that increase each year, in line with age. This means they'll slowly creep up, year on year. They suit people who know their risks might change in the future, and who may need to change their cover down the road. 

With level-term premiums, you can select a period of time (usually 10 years or to age 65) where premiums will stay the same. You'll pay more to start with, but usually over the course of your chosen time period you'll end up saving money when compared to stepped premiums, and it can also really help with budgeting. Level-term premiums work well for people who know they'll need the cover for at least that set period of time, like parents or homeowners.

Where to from here?  

As you can see, there are a whole lot of variables when it comes to income protection cover. Your cover should be designed around what you want to achieve, so you can have confidence that it'll do what you need it to do at claim time. I'm here to help if you have any questions.

Note this article is not intended as personalised advice, and should not be acted upon without seeking independent personalised financial advice from a qualified professional.