Tips for Getting a Safe Income Protection Insurance 

Most young professionals tend to turn up their noses at the prospect of Income Protection Insurance. Who wants to think about providing for yourself and a probable family at 65 when you are just 30 years old? You are probably earning a superb salary and look forward to investments like new cars and swanky homes – things that reflect your improved financial and social prospects and correspondingly improve your social standing immediately. Compared to these providing for a safety net in the form of Income Protection Insurance applicable in the absurd instance of a sudden calamity seems like a waste of earning potential. The thing that most of us fail to realize is that the flashy investments and concurrent loans incurred due to them may become liabilities in a distant future when your monthly paycheck is no longer guaranteed. Now, more than ever, in today’s fragile economic environment, unpredictable environmental hazards and sudden accidents, that future may not be so distant after all and providing for income protection is a necessity rather than a rather paranoid security measure.

Own occupation – After a debilitating disease or accident, the policyholder is rendered unable to return to their own occupation and is not employed at any another similar situation.

Suited occupation – the policyholder is called incapacitated if he/ she cannot work at a job that matches with their education, training etc. after the illness or disease that renders them so.

Any occupation – the policyholder is considered eligible for Income Protection Insurance if she/ he is unable to work at any occupation whatsoever after the disease or illness and is therefore called incapacitated.

Activities of daily living (ADLs) – This is clearly defined by the policy and a policyholder must meet one or more of the stipulated clauses. This is applicable only when a policyholder is unable to perform a list of daily activities and chores (as specified in the policy) after a debilitating disease or illness. These can tentatively include activities like dressing and undressing one’s person, walking, climbing and even eating. People who are unable to work for valid reasons other than accidents or sickness, like, stay-at-home parents caring for children are encouraged to apply under the ADL scheme as the other types of incapacity do not apply to them.

While Income Protection Insurance may sound like a good scheme to apply for in case of an unforeseen calamity, and indeed, many corporations automatically provide their employee’s with premiums towards such schemes, there are a number of attendant clauses involved if the policyholder is found eligible for Income Protection Insurance that need to be carefully looked into before applying for an Income Protection Insurance policy. Please find below a list of clauses that must be researched before applying for any Income Protection Insurance.

The cost of Income Protection Insurance depends considerably on the deferred period allowed by a policy. A deferred period is basically the time lapse between making a valid claim on an Income Protection Insurance policy and the onset of benefits accrued from the same. This can vary from a minimum of 4 weeks to a maximum of 52 weeks. The longer the deferred period, the lesser is the amount of premium payable on the Income Protection Insurance policy.

Due to the possible exploitation of Income Protection Insurance schemes, these policies are generally governed by a large number of restrictions. For example, an Income Protection Insurance policy might cease to take effect in case of unemployment due to factors other than an illness or accident. A change in occupation before any claim on the policy might also have the same effect on it. Otherwise, the insurance company may decide to raise the premium so it is proportionate with the increased risk of the policyholder’s financial situation. Also, accidents or illnesses arising from intentional self-injury, drug or alcohol abuse, wars, criminal activities and pregnancy do not render a policyholder eligible for benefits from such policies.

There are two schematic models applicable when it comes to Income Protection Insurance policies. They are agreed value and indemnity. Agreed Value Insurance is comparatively much more expensive but also compels the insurance agency to pay out the sum agreed upon at the time of the initiation of the policy without being affected by any subsequent fluctuation in the income level of the policyholder. This is particularly useful for self-employed people as agreed value Income Protection Insurance policies are not affected by employment status of the policyholder. Indemnity value policies are much more common and cheaper than other types of Income Protection Insurance policies. The insurance agencies verify your income at periodic intervals for this type of policy and re-adjust benefits accordingly. This type of insurance policy is not recommended for people who have a fluctuating income and/ or scope for being temporarily unemployed at intervals, working part-time or taking forced leaves from employment such as maternity leave. But it is recommended for people with a reliable, regular source of income without the scope of fluctuation. By far, the easiest type of Income Protection Insurance policy to manage is the one that are paid directly out of the policyholder’s superannuation funds as they are cheapest and indemnity-value based. They offer far less features than most policies and are less flexible – which might actually be a good thing in certain contexts. Many superannuation fund schemes offer Income Protection as a default cover even without medical checks.

Income Protection Insurance policies are pretty expensive when compared to other types of policies. They are generally only applicable for regular wage earners, although it cannot work as a guarantee against unemployment but only against calamitous diseases or accidents. There are many types of Income Protection Insurance policies available on the market and you should conduct a thorough research of the clauses and benefits offered by each before opting for one suited most to your needs. Please find below a list of different types of Income Protection Insurance policies and different models of premium payment available for each.

Renewable Income Protection Insurance – Renewable policies are generally the most favored of the lot as they provide the policyholder a right to renew the policy. The renewed policy can even possibly include an increase in the amount covered by the policy. The renew period is generally set at a regular period (say, 5 years). After this period, the policy can be automatically renewed based on the current rate of premiums for a policyholder who falls within that bracket of age and earning potential. The advantage with this kind of policy is that the initial premiums are generally cheaper than a fixed Income Protection Insurance policy. But please keep in mind that this is only a temporary relief as premiums will definitely get more expensive as the policyholder grows older and falls within a progressively higher risk category.

Increasing Income Protection Insurance – The problem with fixed-benefit income protection policy is that their values of benefits often become much lesser by the time the claim is made due to inflation. This is the reason why insurance policies whose benefits increase over time are often found more useful. There are many varieties of increasing benefits income protection insurance available in the market. There are policies whose benefits increase following a fixed percentage, an indexed rate, or even a custom percentage at a periodic interval determined by the policyholder and agreed upon by the insurance agency. The indexed rate is generally determined by indexes like the Retail Prices Index. On the off side though, these type of increasing benefit insurance policies usually come only with increasing premiums over time too.

Reviewable Income Protection Insurance – As the name suggests, reviewable policies are those whose premiums are reviewed every few years by the issuing insurance agency and increased/ decreased based on their general rates. They generally have the same term life as a fixed policy. The original premiums for Reviewable Income Protection Insurance policies are much cheaper and their revalued rate depends on the particular company’s premium rates at a periodic basis. While this cancels out the risk of higher premiums due to deteriorating health of the policyholder, premiums tend to invariably climb higher even with this type of policy. But this type of policies also take care that the policy cover stays sustainable with inflation rates.

Group Income Protection Insurance – Many corporations and other organizations decide to provide for a collective Income Protection Insurance policy for their employees. This is looked upon as a tax-deductible business expense by organizations. This is generally an added taxable benefit for the employee, but a maximum payout period may exist in most cases. Claimed benefits for this type of policy however are free of income tax and National Insurance obligations. The policy can become null and void if the employee ceases to work with the organization that provides for the policy. Since the contract for this type of policy is between the employee’s organization and the insurance agency – it is imperative that both are made aware of your nominees in case of an untoward occurrence.

Unit-linked Income Protection Insurance – This type of policies are a bit of a gamble as other Income Protection Insurance policies have no investment trait attached to them and therefore no surrender value. Typically, the premiums for these policies are used as open-ended investments that are managed and promoted by the issuing insurance agency. They also hold any assets accrued on behalf of the policyholder. The latter does not have ownership of the units nor can they be readily redeemed but they have a right to the assets. Due to the investment involved, their premiums are generally higher than standard policies. And this involves the standard risk of any investment i.e. premiums can be much higher if the return on the investment is meager. The collective investments are generally not safeguarded by an independent body like other types of investments, but insurance companies are generally well-regulated units that tend to manage the investments well in order to secure their reputation in the market.

Income Protection Insurance policies are governed by the rules of Financial Services Authority (FSA) and as such, the rules demand that issuing insurance agencies should keep all records of the contract for at least a minimum period of six years. The policyholder is generally granted a month to cancel any insurance contract and is entitled to full reimbursement of any premiums paid.

A policyholder should consider his/ her future prospects carefully before committing to an Income Protection Insurance policy. The recurring cost of premiums will depend upon the salary you want to insure if and when incapacitated. While general policies tend to cover around 75% of your salary, for agreed amount policies one should consider the cost of meeting your mortgage and any other debts incurred, how much people dependant on you (say spouse, children, parents etc.) need to be provided for and also take care of the cost incurred towards the maintenance of your assets and investments.

Take care to ask the most basic questions like what is covered by the policy and what is not. How much do you seek to benefit from a claim and if it will be proportionate with your projected costs. And most importantly, evaluate how much the premiums will cost you now and after a decade and if you will have enough guaranteed income to maintain the policy through that. Also look for the waiting period and the benefit period of the policy as these may affect both your long-time premium and personal well-being in case of a mishap. One should also consider applying for non-cancellable Income Protection Insurance policies so the insurance company does not have a chance to raise premiums or cancel the policy cover if they detect increased risk due to the policyholder’s health or employment status.

Take care to read through the small print diligently as most insurance companies will try to find a loophole that you never expected in order to turn down your insurance claim once you have paid the premiums. Beware of policies that review your coverage based on taxable income if you are not a salaried employee. That does not mean that applying for Income Protection Insurance policies is a bad idea. On the contrary, it is a sure-fire way to safeguard your monthly income (and more importantly, your lifestyle and debt/ mortgage payments) in case of any untoward incident in the future. Most new Income Protection Insurance policies also offer the option for career breaks so that your insurance coverage is not hindered by your career needs. It is generally a better idea to go for an inflation-adjusted coverage than a fixed one keeping in mind the volatile economic trends of this century. Just opt for a policy that suits your unique financial condition the most.

The risks involved are the same as when you use your present cash to create a probable safety net protect against future problems. You are handing over your cash to another organization to do as they wish with it – provided they look after you at a future period. Any business will try to maximize its profits from such an arrangement, but please keep in mind that they also have their market reputations to safeguard. And as long as your adherence to the mentioned clauses in the contract remains watertight, no insurance organization can afford to refute your claim legally.

However, being considered eligible for Income Protection Insurance policies is a different ballgame. Firemen might stand a better chance to be considered eligible than comedians. Media people are considered lucrative objects from an insurance agency’s pint of view rather than a newspaper seller! If you are concerned about your eligibility, prospective premium costs and insurance coverage, you can look online for several websites that offer a ‘Quick Quotes’ service.

 How to Get a Safe Income Protection Cover