Category Archive: Income Protection Insurance Articles

Can I get Redundancy Insurance if I Lose My Job?

The question of redundancy has come up in questions and conversations for a while. Economic pressure has made redundancy an issue for every employee causing many to look into redundancy insurance. Can you get income protection insurance if you are made redundant? The answer is yes and no. No, you cannot start a new policy if you have become redundant. That would be like trying to buy life insurance after you are deceased. If you are working, then you can buy income protection insurance. Some policies will payout if you are made redundant.

The law does not force New Zealand companies to pay any form of financial retribution if an employee is made redundant. Because the economy is in a state of where it expands and contracts, redundancy is now common place. Income protection insurance is perhaps one of the most misunderstood insurance policy types by both consumers and insurance professionals. Income protection insurance is not just a policy that comes with buying a house.

Income protection insurance is designed to protect your income in the even that you are disabled or injured to the point that you can no longer work or earn money. The thought of being in a situation where you have no income should chill most adults to the bone. Our income is often our greatest asset and over the working life span can result in hundreds of thousands of dollars and sometime millions of dollars. The fact that our income can reach these financial heights is exactly why most of us choose to protect it by insurance.

Income protection works by paying qualified individuals a percentage of their income. The insurance industry in New Zealand offers two types of policies an indemnity policy and a declared value policy. Each riddled with strengths and weaknesses.  Some of the pitfalls that consumers should avoid are as follows:

Policy Renewal

Policies are typically written for a specific period of time and then they can be renewed. Not every policy will allow the consumer to renew.  There are some catch phrases such as, “can be canceled at any time, for any reason.” These policies are designed to provide you income at times when you cannot work. Some insurance companies say that they can cancel a policy because you “might” have a claim . This is especially true of people who have lost their jobs through redundancy.

Redundancy Insurance Benefit Period

An income protection policy provides income when you are injured or disabled. These types of events can last long term. Therefore many people choose policies that cover them for the long term, over policies that only provide payment for short time periods such as, two years, five years. This is a benefit that should cover you until you reach the age of 65 either through policy choice or renewal. It makes little sense to get two years into a recovery and then lose your income. In the case of redundancy, this may not apply since work could be found within a shorter time period.

Group Policies

Sometimes income protection is offered through an employer as part of a benefits package. Policies that are written for groups of people and not for individuals often have escape clauses embedded in them that protect the insurance company in case of a claim. Insurance companies will find any excuse not to pay a claim, and that is why most people are wary of special wording that restricts or limits how the policy may be applied.

Taxation

Taxation is another worry area for anyone who takes out an income protection policy because the reality of taxation and income protection insurance payment is not clear. Some policies payments are taxed and others are not. Many people advise consumers to plan out the financial impacts of all of the ‘what if’ questions that can be asked. What if I am disabled for ten years? What if my policy payments are taxed? What if I am only partially disabled? Many also  sit down with a tax professional to find out if their policy payments are going to be taxed and with a financial advisor and go over their financial situation. Each individual has their own unique financial situation.

Redundancy

The idea of redundancy insurance is about replacing the income that you would lose if your work position suddenly became unnecessary. The consumer’s job is to find a policy that covers redundancy. That can sometimes be hard to do. Like other forms of income protection insurance, there are pitfalls.

 

(This article and all articles on this site are not to be taken as professional insurance advice and information may not be accurate, for insurance advice please speak to a registered insurance broker. We can connect you with a broker by using the form on this site.)

How Do I Get The Cheapest Price for Insurance?

The cost of something is normally compared to its price and its value. Finding the cheapest item is not always the same as finding the best value. A good income protection insurance policy is something that is of value to everyone who is dependent upon their income to satisfy their expenses.  Further, since income is considered one of our greatest and most significant assets, it should be protected from loss.

Insurance, regardless of what type, is never something that is compared on the same merits. This is because the policies for the same kinds of insurance vary so much between one insurance company and another. To choose a product based on the price alone, would require that the products being considered be equal or the same, ie. Apples vs apples. With insurance, it is like comparing apples with oranges. This doesn’t make sense??

How do you find value in a product that is so different everywhere you look? The answer is somewhat complex and simple all at the same time. The trick is to eliminate policies that do not meet your needs or your standards.  To do this with income protection insurance requires that we first understand what our needs are and then we need to look at what are standards are.

To begin with we look at our salary or what the industry calls your pre-disability income.  This is a total of all the revenue that you make in a year. For most of us, that is just your salary, but for others it may include taxable income from investments, etc. The reason why your income is important is because payment of an income protection policy is based on a percentage of your pre-disability income.  The policies payout a range of 55%-75% of your pre-disability income. (are you sure its disability? Sounds like health insurance)

This brings us to the reason why it is important to understand your financial needs. It will become necessary to survive on what an income protection policy pays out if you should become disabled and cannot work. How much money do you need to survive? The goal here is to find the total of your expenses. Look at items like rent or mortgage, medical insurance, car payments, etc. You are looking for a number of the things that you cannot live without. It is often helpful to make two comparisons. The first being your general budget, which generally speaking includes all of your expenses. The second  contains only the things that you cannot live without. Why is this important? It’s important because it will illustrate how much flexibility you have in your budget.

This brings us to another important topic.  Some payments from income protection policies are taxable. The taxation aspect is a very large gray area because the laws that govern this are not always clear and they change.  It is a good idea to discuss the taxation aspect of this with a tax professional that can help to clarify taxation for your specific situation.

For now, we can compare your salary, your budgets, and policy payments to determine what is needed for you to live if you should become unable to work and earn your salary. Once you have your salary and your expenses listed you can plug the number into scenarios that would represent your life if you choose one policy over another.  The goal here is to discover the difference between policy payments.

If your salary is $50,000, and you chose a policy that paid 75% then your income would be $37,500 for the year.  If you were taxed at 15%, then your income would really be $31,875.  If you chose the policy that paid 55%, then your annual income would be $27,500. Already the differences in the policies are beginning to appear. This is of course dependent upon what your actual tax rate is.

Once you determine what your disabled income would be, you can then begin to shop for policies that provide the most money per month if a payout were to occur.  I would also consider taxation because that is a wild card in all of this. This exercise  allows you to determine which type of policy is best for you.  There is also the added benefit that looking at cold hard numbers can bring to you, as well. Understanding is part of solving any problem or puzzle. When you know what it takes for you to live your life, and keep your life style, then it becomes easier to find the best value when looking for income protection insurance.

 

 

(This article and all articles on this site are not to be taken as professional insurance advice and information may not be accurate, for insurance advice please speak to a registered insurance broker. We can connect you with a broker by using the form on this site.)

Understanding Insurance to Preserve Your Income

Income protection insurance is just that, it’s an insurance policy that helps to protect income if a disability or illness should make it impossible for you to continue to earn a wage.  Income protection insurance is the mirror image of health insurance.  Where health insurance is designed to help pay for the cost of medical care, income protection insurance is designed to help maintain income levels if you are unable to work due to injury, disease or illness.

It’s one thing to have just health insurance, but without income protection insurance, you are only half covered.  Sure, your medical bills will mostly be paid but what about the mortgage, or the car payment? Income protection picks up and works to cover the other aspects of our lives that are mostly unprotected if disease or illness strike.

Income protection usually works in conjunction with disability insurance and often picks up where disability insurance ends.  Disability insurance also rarely pays 100% of lost income.

Key Points To Consider

  • What happens to income if catastrophic illness strikes?
  • What happens to income if a non-work injury occurs?
  • Am I covered by disability insurance?
  • What does disability insurance cover?
  • What about redundancy?
  • How long can I live off of my savings account?

Why Purchase Income Insurance?

One of the primary reasons to purchase income protection insurance is directly related to the advances in healthcare.  Today’s modern medicine has made major breakthroughs in treatment of what used to be fatal disease and injuries.  The result is that it now takes patients longer to recover from injury or serious illness.  Income protection insurance allows money to keep coming in the door while recovery takes place.

Taxation is another reason to consider income protection insurance.  Sometimes income from a work-benefit account is actually taxed whereas, income from a personal income protection insurance plan is not always taxed.  The difference could mean a large tax bill if your income protection plan pays out. Understanding both federal and local laws regarding taxation of income is important.

Payments are yet another reason to consider income protection. Disability payments are rarely 100% of earned income.  They are often based on a percentage of gross wages. Income protection usually pays 100% of your current wage, depending on the type of policy that is chosen.  The difference can be thousands of dollars each month.

Options To Consider-Policy Types

There are typically four types of personal income insurance policies.  Those are the agreed value policy, the indemnity policy, the loss of earnings policy, and the loss of earning plus policy.

The agreed value policy is a fixed payment system, and the amount of the payment is assigned when the policy is started. Payments are typically between 50-55% of gross income.  Taxation of payment is a grey area, usually with such a low percentage of payout the insurance is not considered taxable, but that is not always the case.

Loss of earnings policy this is a comparison type policy that compares your regular income to the drop in income and then pays 75% of the difference.  Pitfalls of this policy type are cost. This policy can pay a great deal more per month than most policies, but that payoff should be balanced by other factors such as cost, and risk.

Loss Plus policy is a policy that should be considered because of its ability to pay either on loss of earnings or as a fixed value policy. The choice of which pay-out function to choose is up to the consumer after the claim is filed.  This allows the consumer to be in control of how much the policy will pay.

Indemnity policies pay based on part of your gross income. How that is determined, is up to the insurance company.  Sometimes they pay based on a compilation of wages over a span of years or as a percentage of current income.  These benefits are taxable, and that is often a major consideration for anyone who is looking to buy income protection insurance.

 Conclusion

The reason to purchase income protection are valid, but many consumers continue to go about life unprotected.  This is most likely due to not fully understanding how their life will be impacted if their income is lost through injury or illness.  For those of us who cover ourselves with income protection insurance it is a good policy to review the limitations and the payment structure on a yearly basis.  This is especially true if income levels change.  Utilizing the types of policies available can help consumers to choose an insurance policy that covers them best.

 

(This article and all articles on this site are not to be taken as professional insurance advice and information may not be accurate, for insurance advice please speak to a registered insurance broker. We can connect you with a broker by using the form on this site.)

Income Protection Insurance and Taxation In New Zealand

Taxation is never a clean and cut within the insurance industry, and that statement is even truer when we consider income protection insurance and payouts. To make matters even more confusing, the tax laws have taxed and untaxed insurance payouts in a back and forth manner over the last 20 years. Insurance policy payments are taxable, but the question continues about who is responsible for the money due under taxation.

At one point, it was the insurance company. At another time, it was the policy holder.  After much debate and struggle, the laws changed again in 2010, and the tax was raised on insurance companies. This was a reversal of sorts from the 1990 laws that decreased the amount that insurance companies were paying in taxes.

In regards to income protection insurance, sometimes the beneficiary is responsible for taxes on payment and sometimes they are not.  The problem is even more compounded because taxation is not individually specific.  It is dependent upon which type of policy you purchase. Some policies payouts are untaxed while other payouts are taxed as though they payment is income. That in and of itself is the crux of the problem.  Is the payment for income protection actually income?

Income Payouts

The problem for consumers is that income protection is designed to replace income that is lost when a person becomes unable to work due to most injuries or illnesses.  The payout for income protection is already reduced by 25%-45%. To be expected to pay taxes after receiving a 25%-45% reduction in income is difficult.  The idea behind income protection is to allow people who are unable to work, because of injury or illness, continue to pay rent or mortgages and live within their life style. That is rather difficult if someone loses up to 45% of their income and then is expected to be taxed on the remainder.

The solution is found within the types of policies that are available for consumers who are looking to protect their income.  Certain indemnity policies offer a payout at 55% of pre-disability income.  It is these policies that are often not taxed as income. Still that is not a very large concession if you are already facing recovery from illness or injury.  The policies that pay 75% of pre-disability income are usually taxed, though not always.  Again, it comes down to how the tax laws are being applied, and it is always a good idea to find out your own specific answer by talking with a tax professional.

Get Professional Tax Advice

One of the best pieces of advice is to sit down and talk with a tax professional who can help clear up this question. Sadly, there is not a blanket answer that covers everyone because income is such an individual matter.  A tax professional is usually the best bet for finding a solution that will protect income and save taxes.

Keep in mind that it is best to go through this process before you find yourself injured or ill.  The best thing to do is to compare your income to your expenses and then look at the scenarios that are available with each type of income protection policy available.  Policy choices are typically either an indemnity policy or an agreed payment policy but also make sure you read the policy to assess how long you will be paid out for.

Between the two are several customized policies, that are put together for competitive reasons between insurance companies. The New Zealand insurance market is still competitive which can help consumers who are looking for better prices. Again, it is important to look closely at the payout percentages because there is a wide gap in income between a payout that is 55% of your pre-disability income and 75% of your pre-disability income.

I suspect that as time goes on the tax laws will again change. It is, therefore, advisable to review your options on an annual or semi-annual basis. Insurance policies in general should be reviewed at least annually because our lives are never constant.

Since income protection insurance is designed to protect our income from loss if we are unable to work, it is important that people begin to prepare for the what-it’s. For most of us, our income is our greatest asset, and it is only prudent that we protect that asset as best we can.  Compare your income to your expense and then compare policies.  When in doubt, sit down with a tax professional and determine if your choice of income protection is likely to be taxed or not.  Crossing all of the T’s and dotting the I’s is the best any of us can do to see ourselves through the harder times in our lives.

 

(This article and all articles on this site are not to be taken as professional insurance or taxation advice and information may not be accurate, for insurance advice please speak to a registered insurance broker. We can connect you with a broker by using the form on this site.)

Do I Need Income Protection Insurance?

You don’t ‘need’ to have income protection, however the question you should ask yourself is, what would happen if you fell ill or lost your job and your income dried up? Most Kiwi’s would only last about 3 weeks without their income.

do i need income protection insuranceAlmost every needs income protection insurance, if they do not have alternative sources of income from a single salary or substantial saving and/or assets.  Income protection insurance is designed to help replace part of our income if we should become injured or ill and cannot work.  Our income is considered one of our greatest assets, and though many people do not realize this, it should be covered by insurance in case of loss.

To help illustrate the need for income protection insurance we can compare social behavior and the fact that many of us spend hundreds of dollars each month on medical insurance that would pay for treatment if we should become injured or fall ill.  So what happens to our income if we fall ill or become injured?  For a short time, we may be covered by disability insurance, but for how long?

Looking At Complete Coverage

A total protection plan would include both medical insurance and income protection insurance because one provides for treatment to live and the other provides for protection to live one’s life.  Income protection insurance is designed to protect our income when we suffer from a qualifying event.  The money we would receive from insurance payouts each month is what we would use to pay our bills.  It’s one thing to live through a catastrophic illness or injury and yet another to survive and pay your bills, pay your mortgage and life your life.

A good way to determine if you need income protection insurance is to look at how much it costs you to live.  How much is rent or mortgage? Could you pay that if you lost the income from your job?  How much money each month do you spend on necessities such as food and insurance? Could you pay those bills and buy food if you lost the income from your job?

Income protection insurance is divided into several categories. An Indemnity policy pays up to 75% of your monthly income as defined prior to becoming totally disabled, the amount to be paid is minimum any post-disability income.

An Agreed Value Policy, which can pay up to 75% of pre-disability income to a maximum amount declared within the policy. An agreed value policy is beneficial if your actual income should drop after the policy is in place.  Under an indemnity policy, your payment would be 75% of your actual income.  Under an agreed value policy, your payment would be 75% of your agreed income at the time the policy was taken out.  Within either category, agreed valued or indemnity, there are other types of policies that can be offered depending up on the broker or underwriting company.

Preparing for Loss

There is an age range that applies to income protection policies and beware that the cheapest policy is not always the best.  The minimum age limit is 18, and the maximum is usually 60 years of age, though the maximum age limit can change from one company to another.

Taking the time to look at your income and comparing income to expenses is the first step in answering the question; Do I need income protection cover? It can be a real eye opener for many people as most of do not fully realize how much it actually costs us to live each month. Learning about the different types of policies available and how much you would receive if you lost your income through a qualifying event is also important.  It puts into perspective what is available to you as a resource for income.  There is a sense of empowerment when we take the time to look at the benefits that are available to us.  The income that we earn throughout our working lifetime is the greatest asset we will most likely have. Learning to protect that income is a sensible step to insure our life style and to help protect our assets, credit, and home.

Related Article – Income Protection and Tax

 

 

(This article and all articles on this site are not to be taken as professional insurance advice and information may not be accurate, for insurance advice please speak to a registered insurance broker. We can connect you with a broker by using the form on this site.)