Taking out a home loan is a major financial commitment. But what happens when you lose your job or sickness strikes? Chances are you could default on your home loan and have your house taken away. Dixie Clough shows how to keep your income and your mortgage going
Income protection insurance pays you a monthly benefit when you’re unable to work due to a disabling injury. In essence, it becomes your salary. With the benefits you receive through income protection insurance, you can pay your mortgage and any other bills you may have. The amount you receive is usually restricted to 75% of your average yearly salary or to some maximum amount set by the insurance company, which is usually around $5,000 a month.
Who should get protection?
Generally everyone who works 30 or more hours a week can and should get some type of income protection. Think about it. Where would you be without a steady income? Would you be able to keep your house, your car?
Clive Levinthal, general product manager at CommInsure, notes: “People depend on their salary, wages and bonuses to maintain their standard of living and pay the bills. Income protection insurance provides peace of mind to individuals, knowing that if they’re ill or injured, up to 75% of their income will be replaced and they can maintain a reasonable lifestyle while recovering.”
The basics of income protection insurance
A premium is the amount you pay to the insurance company in order to secure your income protection. The minimum premium for most companies is usually around $240 per year if you pay your premiums monthly and $200 per year if you pay the insurance company an annual lump sum.
Premiums usually increase each year with inflation rates and also with your age, on the assumption that the older a customer is, the higher the risk of disability. For this reason, Levinthal recommends taking out income protection insurance as soon as possible. “When a person applies for income protection insurance, they normally must undergo a ‘rating’ process called underwriting. The younger and healthier you are, the lower the premiums,” he says.
Make sure you carefully read what is included in your premium prices and how and when the insurance company can increase your premiums. Factors that will affect your premium include your occupation, age, gender, health, smoking status, and the waiting and benefit periods you choose. It’s also important to consider whether or not the company would waive your premiums while you’re being paid a benefit.
One of the first decisions you’ll have to make is the length of your waiting period. This is the time between the point at which you become disabled and when your payments begin. Generally the choices include 14 days, 30 days, 60 days, 90 days, one year or two years.
“The most important consideration of an income protection policy for many people is likely to be the length of the waiting period,” says Jacqui McCarthy, a financial planner at ANZ Bank.
“Clients should seek professional advice in order to ascertain the amount of time they can comfortably afford to make ends meet without an income. A financial planner can help build a policy that’s most suitable for you.”
There are a few key things you should think about when setting the waiting period. First, does your employer offer any support if you become disabled? How long would this support last? How inclusive is the support – will it be enough to pay all of your bills?
Income protection will deduct any extra income you’re receiving from superannuation policies, so you’ll only receive 75% of your pre-disability income in total. If your employer will pay you 75% of your salary for a year or two, you should probably choose a longer waiting period, as this will cut down on your premium rates. Also, remember to ask the insurance company if and when you’re allowed to change your waiting period.
The benefit period is the length of time after your disability that the insurance company will pay you the benefit. You can choose to be paid benefits for just one or two years up to as long as it takes you to reach the age of 65. Remember, the shorter the benefit period, the lower the premium.
Every company has options you can add to your benefit. When thinking about added benefits, remember to take into account what you would receive from your other insurance policies if you become disabled.
Each company provides different options, but there are a few options that almost all companies offer. Keep in mind that although these options may come under the same name, the elements may differ between companies. Be sure to read the fine print and find the options that are right for you.
With this option, not only will your premiums increase each year with inflation, so will the size of your benefit. However, your benefit will only increase
while you’re paying premiums, meaning that once you’re being paid the actual benefit, the benefit will no longer increase with inflation.
Partial disability benefit
One of the most common options is the partial disability benefit. This option will provide you with cover even if you’re not totally disabled. ‘Partially disabled’ is usually defined as being unable to work the same number of hours or even the same job as before the partial disability, and as a result your salary has lowered significantly.
The restrictions are greater with this option and it’s very important to read the company’s official definition of a partial disability before selecting this benefit.
Rehabilitation expenses benefit
While you’re receiving total or partial disability payments, the insurance company may also provide extra money for rehabilitation costs, up to a certain amount and usually for a lesser length of time than your benefit period. Health insurance companies often offer rehabilitation money as well, so be sure the two benefits don’t overlap.
Exclusions are extremely important when choosing an insurance company for income protection. Exclusions are the clauses that state when the insurance company can refuse to pay your claim.
Some companies can be very tricky when writing these exclusions, so make sure you understand them fully before signing up for insurance.
Don’t limit your reading to the exclusions section of the policy, but also read the definitions of total disability, partial disability and any other definition in the information given. It’s important to remember that if your condition doesn’t match the definitions given, the company can refuse to pay you benefits.
Who provides income protection insurance?
Many lenders offer this product to borrowers when they sign up for a loan. Often companies will give discounts or extra benefits to clients who have taken out more than one type of insurance with them.
“Most banks offer traditional income protection as well as policies that cover only the home loan repayment – where the premium can be funded into the amount borrowed,” explains Jason Cleveley, senior product manager, St.George Bank. If you don’t need income protection, but simply want to make sure you won’t lose your house in the case of disability, this may be the best option for you.
What should you look out for?
As mentioned above, the main thing to watch out for when choosing an income protection plan are the exclusions. Some companies not only limit the type of disability you can have, but also where that disability can occur. If you have an occupation that requires wide travel, make sure your policy will cover you.
Another factor to pay close attention to is when and why a company can cancel your policy. Make sure they can’t cancel your policy because of failing health or age. Make sure you read all of the offset clauses on why a company can reduce the benefits you’re paid. And remember to read the definitions and ask the company about anything you don’t understand.
Cleveley advises borrowers to seek professional help when making a decision about income protection insurance. “Typical traps are not seeking advice and therefore applying for cover that doesn’t match [the customer’s] needs,” he says. “For example, ‘cheaper’ options may not provide sufficient cover. Alternatively, more expensive options mean people pay for benefits that they may not need.”
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