The benefit period for income protection is dependent upon the type of policy that is purchased. Sometimes the benefit period may be as little as two years in length. Other policies may offer benefit coverage until the policy holder turns 65 years of age.  For most consumers the longer the benefit period lasts the better.

In fact, the benefit period is on one of the many pitfalls that consumers may not be aware of as they shop for income protection insurance. As we talk about the benefit period, keep in mind that each policy may contain several different benefit periods for different cases that may occur.

Income protection insurance is a policy that is purchased to help protect or insure the policy holders income if they should become disabled or so sick that they can not work. This is also one of the most misunderstood of all the insurance policies that are offered to the public. The confusion comes mostly from determining how the policy will be paid out. There are different methods of ascertaining annual income. There are different reasons why policies can be canceled. There are different payouts for different forms of disability.  There are even different policy types that have their own rules of enforcement and payment. In short, income protection is complex. It gets worse if you throw in to the mix the government and taxation.

Benefit period

Of all the pitfalls that are out there and that involve income protection insurance I think the largest is the benefit period.  If we go back to the concept of income protection insurance, and realize that income protection insurance is designed to protect our income throughout our working life time, then the idea of the benefit period should become clear. Our working lifetime is from the time we start work until we retire at age 65.  There is only one reason why anyone would ever take an income protection policy out for less then the length of our working lifetime.  That one reason is if we are 60 years old and the policy covers us for five years, because, in five years, we are at a retirement age.  That is the only logical reason why any consumer should think about taking out an income protection plan that does not cover their working lifetime.

To paint this picture assume that at age 19 you make $20,000 per year for the rest of your working life. That is 46 years and $920,000. At $20,000 per year, why would you want a policy that only covered you for two years?  That amounts to 55-75% of your annual income which is $11,000 – $15,000 per year (55%-75% of annual income) for two years equals $22,000 – $30,000.  Compare those numbers to your life long income of $920,000.  If you had a piece of art that was valued at $920,000 would you insure it for $30,000?  Probably not. This is why benefit period is important. It is also why buying income protection is necessary.

The reasons why income protection insurance policies that have a benefit period of less then your working lifetime are not worth the investment is because the payments will stop when the benefit period expires. It does not matter if you have recovered or if you are still disabled or even partially disabled when the benefit period ends so does your income protection and monthly checks.

There are companies out there that offer income protection insurance policies that expire when you turn 65 years of age. Those are the policies that most people consider. Consumers who look at their long term financial risks and opt to purchase an income protection policy often first sit down with a financial consultant and work out the numbers.  What you are looking for is the financial stability that will allow you to keep your lifestyle, pay your mortgage, and live a little. To understand fully what that is going to take requires guidance.

The issue of taxation came up briefly, and that is a real concern to anyone who receives a payout from income protection policies. Taxation is a gray area, to say the least, and whether or not payment from an income protection policy is considered taxable income is something that only a tax expert can help you with. The reason is that the types of policies that are available pay very differently.  Some payments will be taxed, and others might not be taxed.  The laws that govern this change frequently and the answers to these questions may change every couple of years.

 

 

(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.)