You may think that it's better to have some form of income protection insurance than none at all but, for a large proportion of people, their income protection insurance arrangements may not live up to their expectations when it really matters... at claim time.
So, whether you are considering income insurance options for the first time or reviewing your existing income protection plan, here are some important things that you might want to watch out for.
This list is not exhaustive, but it's a good place to start.
1. Don't consider 'accident only' disability policies unless you have no other choice
Unless your employment, health, claims history or other circumstances prevent you from taking a full disability policy covering both injury and illness, accident only disability policies are generally considered a poor option. Historically, somewhere around 80% of disability claim payments are for illness, not accident.
2. Avoid income insurance policies with a limited benefit payment period.
The benefit payment period is the number of years that your policy will continue to pay in the event of a claim. Some income policies limit benefit payments for only one or two years, where other policies will continue paying income benefits right up to age 65 - or even for a lifetime in same cases.
If you need to compromise in order to get your premium to fit your budget, you can enjoy considerable savings by extending the exclusion period (excess) on your policy in exchange for a longer term benefit payment. Waiting an extra few weeks for payment at the beginning of a policy might be far more affordable than having claim benefits cancelled after 2 years in the event of a longer term disability
3. Be careful of disability insurance plans with a benefit payment period differential
These are income protection plans that have a different benefit payment period depending upon whether your disability is classified as being an accident or an illness. A common example is where the policy offers accident benefits to age 65 but illness benefits for a maximum of 2 years only.
If you do have one of these, you should pay particular attention to the policy definition of what constitutes an accident vs what is considered a sickness. Many long term disability claims are as a result of complications from what was originally an accident. If your insurer has the option of opting out of claim payments because you no longer meet the criteria, they probably will.
4. Beware of policies that don't index claim benefits
This is not particularly relevant if you do choose a policy with a benefit payment period of only one or two years but, in the longer term, the real value of your policy will diminish significantly if the payments you receive aren't designed to keep up with inflation. Remember, if you are in the unfortunate position where you must make an income protection insurance claim, you won't want to have your income eroded by inflation.
5. Steer clear of income insurance policies that are not guaranteed renewable by the insurer
If you claim on a home or car insurance policy, your insurer will generally have the right to either cancel the policy or to increase your insurance premiums - leaving you to work through the options.
With income insurance, the chances of being able to find another policy after you have made a claim can become quite slim at a time when you probably need the cover most.
6. Watch out for policies that don't include automatic CPI benefit increases
It's relatively easy to buy more insurance as long as you remain healthy but, as you get older it can become more difficult to satisfy the insurer's application criteria - particularly if you have been sick or hurt along the way.
CPI indexing is a way of staying up-to-date without having to reapply or satisfy any underwriting criteria along the way.
7. Avoid policies with an inadequate disability definition for your situation
This is a big one that could have a devastating impact on your ability to claim depending on what has actually happened to you.
Many policies anchor their definition of disablement on the duties of your occupation impacted by your accident or illness. Other policies determine your eligibility for a claim based on the effect that your disability actually has on your income.
For example, your income protection policy may cover a claim if you are unable to perform the substantial duties of your occupation as result of your disability - but this does not help if you can still perform all of the duties of your occupation for only some of the time! A duties-based definition may not cover this eventuality where an income-based definition could.
There are pros and cons of both duties-based and income-based disability definitions. Depending on your personal circumstances, you may wish to consider one of the policies on the market that includes both.
8. Don't get caught with inadequate partial disablement benefits.
A lot of policies on the market make the assumption that your injury or illness will render you totally disabled for a time - after which you may be able to start to return to work.
Partial disability benefits were designed to cover this situation, however some companies don't provide benefits if you are partially disabled from the outset unless you are totally diabled first. This means that you could potentially be excluded from claiming on income insurance for any disorder that is degenerative in nature - until after you have been able to meet the policy's definition of total disablement. This could take years for many illnesses in particular.
So you may want to check the definition of partial disability to ensure that it doesn't include words like "after a period of total disablement".
9. Watch out for benefit amount limits
Most income protection policies will limit monthly claim payment amounts to a percentage of your pre-disability earnings. It's not just the actual percentage that you have to watch out for, you also need to know how the policy defines your earnings. Sometimes the pre-disability earnings are defined as the earnings at the time the insurance was purchased, other companies define this as income earned at the time leading up to the claim.
10. Be careful comparing income insurance quotes on price alone
If you pay peanuts, you may well wind up with monkeys. The need to claim on your income protection may never eventuate but, in the event that you were to become seriously ill or injured, the amount that you saved on your premium payments at the outset will be of little consequence to you.
An income protection insurance consultant worth his or her salt can help you better understand your options and will source and suggest an income insurance plan that best meets your needs.
As a final word, don't be led into a false sense of security. Income protection insurance is too important for that. Understand your options, know your policy and you can avoid any nasty surprises when it's too late to do anything about it.
Statistically one in three of us will suffer a disability of 90 days or more in our working lifetime. I'm pretty sure that it won't be me, so that leaves a 50% chance that it will be either you or the other guy!
