Income protection insurance is insurance cover designed to act as an income replacement for a specified period when you are unable to work due to illness or injury. Income protection insurance usually cover up to 75% of your salary and often, insurance providers may give you the option to add additional riders such as a super guarantee option or an increasing claims option. At the time of completing the application you will need to choose an appropriate benefit and waiting period.
The benefit period is the duration that you will be paid for while on claim. For example, you may opt to have a benefit period of 2 years, which means that your claim will be paid for two years only.
The waiting period is the amount of time you will need to wait from the moment you become unable to work to the time you become eligible to start receiving your income protection benefit payments.
For example, if you have a waiting period of 30 days, it simply means you will have to wait 30 days from the day you were unable to work until you qualify for an income replacement benefit. Waiting periods can range from 14 days up to 720 days. Whilst the waiting period defines the time prior to the commencement of a claim, it is important to remember most insurers pay benefits monthly in arrears. Assuming you have a 30 day waiting period, and qualify for an ongoing Income Protection claim, your first benefit payment will not occur until one month after the expiration of the waiting period or approximately two months after suffering an event that leads to a successful claim.
From a premium perspective, the longer the waiting period, the lower the premium. Equally, the greater the benefit period, the more expensive the premiums will be.
So how long should your waiting period be?
Understanding your cost of living is important. You should ensure you have sufficient savings to meet your ongoing costs of living. If your cost of living is $1,000 per week and you have selected a 30-day waiting period, ideally, you would have access to around $8,000 in savings/redraw etc. to continue living comfortably. Please don’t include savings in your anticipated cost of living.
You should also consider any available sick leave and unused long service leave when considering Income Protection. Insurers generally require you to use all available sick leave up before they will pay you a benefit.
Whilst you may have selected a 30-day waiting period, you could have more than 30 days of sick leave, Annual leave and unused long service leave. Only once you have used up your other leave entitlements can you receive a benefit from Income Protection.
One thing that should be understood is that when it comes to choosing a waiting period it shouldn’t just be about paying a lower premium. It should be based on what you can realistically live off in the absence of a regular income, before you start receiving your benefit payments.
When choosing a waiting period, you should consider all your expenses including all regular payments you make such as rent, or mortgage payments, car payments, loan repayments, other insurance payments, school fees, etc as well as your day-to-day living expenses.
You want to choose a waiting period that will make you feel secure and well covered. One that helps you bridge the gap between the time of your illness or injury and the day you receive your first benefit payment. In saying that, you also want to make sure the waiting period you choose reflects a premium that you can comfortably meet.
Before you apply for income protection insurance considering meeting with your financial planner, they will be able to do a full analysis of your financials and will help you determine what level of cover would be most suitable for you.
Most importantly, when receiving income replacement, please remember the benefits are considered income and are taxable. It is critical you put aside sufficient funds to meet your tax liabilities.
LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you in managing your SMSF.
Would you like to discuss your personal position and Income Protection needs further with one of our highly qualified financial planners?
Why not call us today on 03 9596-7733? There is no cost or obligation for our initial conversation/meeting.
Written by Nicole Christie of LifeTime Financial Group. A leading privately-owned Melbourne based Financial Planning practice.