Income Protection: Your Salary Cover In Need

   

One of the important protection that you need to consider is income protection insurance.  This insurance will pay most of your income when there is unfortunate event beyond your control that prevent you to earn that income. For example: if you are involved with some accident that make you unable to work for several months or you suffer from an disease or illness that make it impossible to work as normal. In this case, usually your employer will not be able to employ you any more, and you will receive the replacement of your salary from the insurance company instead. (Unfortunately, no payout will be transacted if you lose your job because of your own will or sacked by the company)

How It Works

When you take the insurance, you will need to provide a proof of your salary. Then based on the profile of the job and the industry the insurance company will give you a quote of how much you need to pay the monthly / yearly premium to obtain this protection. For example: you earn $3000 per month as programmer then you probably quoted $50 monthly as premium.

Please note that the payout that you will received when you lodge a claim will not 100% of the salary but some high percentage of it (usually up to 80% or 90% depends on the provider). Of course this is designed so that you will prefer to continue to work rather than not working and receive lower pay.

Waiting Period

Protect Your Income

There is one most important parameter when you take this insurance: the waiting period. The waiting period is a time between the lodging of the claim and the start of the payment. Usually you can select this from 1 month to several years. If you choose 3 months waiting period for example, once you lodge your claim, the insurance company will only pay you after 3 months later. The longer the waiting period, the cheaper the premium. So, if you choose 1 month waiting period, you will pay the most expensive rate compare to 2 years waiting period or longer which will be significantly cheaper.

Why people want different waiting period ? Actually, it’s all up to you in consideration of your own financial situation (emergency cash available, etc) and the current budget. If you have some financial protection and can continue live without support for several months, then you can choose longer waiting period that reward you with cheaper premium.

Expiry Date

The second important parameter is the expiry date. Some insurance will provide you with the salary replacement payout only for the first 2 years of the claim. Other can provide the protection until you reach the age of 65 years old. Of course, the one only give you 2 years protection will be much cheaper than the one provide you up to 65 years old in term premium that you need to pay.

Which One to Choose

As life insurance, income protection insurance is also a product that you buy but you wish you will never need to use it. But when you do need it, you want to make sure it give you the full benefit. So, in my opinion, you need to cover yourself up to 65 years old or more if the offer exist and get the shortest waiting period possible. But what is the cheapest way to save on insurance.

Here is what I find the most economical that give you maximum benefit:

• Get income protection insurance from your Superannuation ( IRA / 401k / other pension plan fund). Usually the income protection available is only limited to 2 years expiry date. Choose the smallest waiting period, say 1 month. In Australia, most superannuation fund will offer this , check your local agent. By using this benefit, actually you don’t have to pay anyting extra as the premium will be debited directly from your fund. The money that you probably cannot touch until 65 years now give you immediate direct advantage. Of course if you want to maintain this fund you can always add some extra payment to cover this direct debit.
• Get the second income protection from other company that require 2 years waiting period but can cover you up to 65 years old. Because the waiting period is quite long, you will find yourself only have to pay some significantly cheap premium.
• Tips: do the above combination with your life insurance as well.

So, with this arrangement, for the first 2 years you will get income protection from your superannuation fund with “free” premium, after 2 years to 65 years old you will be cover by the 2nd insurance and you pay very cheap premium for that.

What To do Next

I would recommend you find an insurance broker. Then make appointment to review your situation and  get a quote for your income protection insurance. Wait his/her recommendation, but if they did not recommend the combination above, then explain to him/her that you want it for your maximum benefit. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this important item.

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Denis Kristanda  

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