Why do you work? Hopefully, because you enjoy what you’re doing! And also, because working earns you a predictable monthly income, which allows you to plan for the future. Your hopes and dreams all depend on the assumption that you’ll continue to earn an income until you retire.
But what happens if you’re suddenly unable to work, either because of a dread disease, accident or injury? Without an income for a few months (or maybe even years) it will be a real challenge to meet your bond repayments, pay school fees and cover your other monthly expenses.
What is income protection?
It’s insurance cover that offers you financial protection by replacing or supplementing your monthly income if you are permanently or temporarily unable to work due to illness, impairment or disability. Some income protection products also cover retrenchment.
Who needs income protection?
Well, anyone who relies on their monthly income to pay the bills and save for retirement. It’s not just for employees either: self-employed people will benefit too, especially since they don’t have paid-for sick leave to fall back on.
How much cover do I need?
Income protection is designed to maintain your standard of living and also help you save towards retirement. You need to consider your monthly living expenses and your retirement goals before you decide on a total amount.
Unfortunately, the premiums you pay towards income protection are not a tax-deductible expense. On the bright side, however, income received in the event of a claim is tax-free. For example, if you’re covered for 50% of your salary, you will receive the full 50% without having to pay tax.
What to look out for when shopping for a policy
• Insurers put an upper limit on the monthly income they will pay out. This could affect your financial plan if the upper limit is below your financial needs. Likewise, there’s usually a maximum percentage of income that an insurer will apply to your cover amount. In other words, it would be a mistake to assume that you are covered for 100% of your salary when the insurer’s maximum percentage is, for example, only 75%.
• Check the term of the pay-out. Most income protection policies don’t pay out for life, so make sure you plan appropriately beyond the cut-off date. Also, check the exclusion period — how long it takes before the policy is valid. This could be anything from two weeks to three months. If you take out a policy today and fall ill tomorrow, it’s unlikely you’ll be covered.
• And lastly, check if you’re already covered. Some employers offer income protection as part of their employee benefits scheme. Take this into consideration when looking for income protection in your personal capacity — there’s no point paying extra for something you already have. Plus, there’s a cap on the benefit regardless of the number of policies — you won’t be paid out more than you earned before a claim.
The bottom line
Your biggest asset isn’t your house or your car — it’s you! Take steps to protect your ability to earn an income, so that if the unthinkable happens, you and your family won’t have to worry about money on top of everything else.
Before you choose an income protection policy, it might be helpful to chat to a financial planner to make sure you have adequate cover, and also to make sure your income protection fits in with your overall financial plan.