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.)