Opinion & Analysis
IPAW: Questions to ask when buying IP
31 Aug 2021
Protecting your income with income protection insurance is essential because your ability to earn an income is your most valuable financial resource. After all, it’s your income that makes your current lifestyle, your ability to take care of your family, and your future plans possible.
To ensure you get the best coverage for your needs, ask yourself the following questions about protecting your income.
When Will Payments Begin?
Generally, most long-term income protection policies do not begin paying benefits immediately—the time you must wait for benefits to begin is known as the “deferred period”. The most common deferred period lengths are 30 days, 90 days, or six months after a disability occurs.
How Long Will My Payments Last?
Similarly, an income protection policy will specify the maximum length of time benefits can last. Typical options are one year, two years, five years, or until retirement. The longer the maximum benefit period, the higher the premium will be, but the better you’ll be covered against unexpected events in life.
How Much of My Income Will be Replaced?
An income protection policy will generally not replace all of your income as your insurer will want to maintain a financial incentive for you to return to work and your living costs may be lower if you are not working. Policies typically range from 50 percent to 65 percent of your earnings at the time of purchase.
Make sure to ask whether the policy has scope to increase benefits in the future, due to inflation or increase in your income. You may be able to add a cost-of-living adjustment to a policy that increases by a specified percentage after each year of disability. While this option is often expensive, it can be vital to maintain your standard of living if you’re out of work for a long period of time.
What Is Covered?
Every policy will have a “definition of disability” that explains what must happen in order for you to qualify for benefits. The key is whether an illness or accident stops you from working, and what type of work it stops you from doing.
For example, a policy with an “own occupation” definition will pay benefits if your disability stops you from doing the job you had at the time of the accident or illness. However, a policy with an “any occupation” definition will pay benefits if your accident or illness prevents you from doing any work for which your education and experience are appropriate.
While many variants exist, they are generally based on one of these concepts or some combination of the two.
What Factors Affect the Cost of My Premiums?
Several factors can affect the cost of premiums in an income protection insurance policy:
- Age: The younger you are, typically the lower your premiums.
- Health history: You’re more likely to pay higher premiums or even find it hard to buy insurance if you have a history of medical problems that could affect your ability to work in the future.
- Occupation: If your job carries a higher risk of injury or is more physically demanding, you’ll generally pay higher premiums than a less physical or danger job.
- Current income: The more money you make, the higher the amount you would expect to receive in benefits, which means your policy will become more expensive.
- Deferred period: The longer your deferred period, the lower your premiums will be
- Length of benefits: The longer period any benefits could be paid over, the higher your premiums are likely to be.
This article is based on an original article by the Council for Disability Awareness which is a nonprofit organization dedicated to educating the American public about the risk and consequences of experiencing an income-interrupting illness or injury. The CDA engages in research, communications, and educational activities that provide information and helpful resources to wage earners, employers, financial advisors, consultants, and others who are concerned about the personal and financial impact a disability can have on wage earners and their families. This does not constitute financial advice.