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.)