Protecting income with insurance

We all insure our cars and our properties but not all self-employed persons insure their income. Income protection insurance replaces the income lost through your inability to work due to injury or sickness. It is an important consideration for anyone who relies on an income. It is especially suitable for self-employed people, small business owners or professionals whose business relies heavily on their ability to work.

Each income protection policy has its own definition of disability and range of benefits and the financial adviser’s role is to compare policies in regards to premium, benefits, claims handling, and policy wordings. They are not all the same in fact there can be major differences between what is covered and not covered between policies. Most policies offer cover for up to 75% of your gross wages for a maximum time period between 2 years or up to age 65. The longer the maximum claim period is the more expensive the premium. The premium for income protection policies is payable on a per year basis, and may increase with age, or stay level each year from the outset. The premium that rises each year is called a stepped premium, and is generally a lot lower than the level premium at the outset, but rises each year as the risk increases to the insurer. Level premiums do not increase, but are higher at the start, generally speaking it takes 7 years of insurance premiums to be paid before the stepped rate becomes more expensive than level rates. If you do elect to take stepped premiums, later in your working life stepped rates can become very expensive. The government supports insuring income, and most Income protection premiums are tax deductible. You need to pick a waiting period when you select your level of cover. This is the period of time (often 30 to 90 days) before you can make a claim. Income protection was not created to cover the common cold or flu but to provide protection of income for major illnesses or accidents that stop us being able to work and get paid an income.

Because of this one way to reduce premiums is to take into account your leave balances (e.g. annual, sick and long service leave) and access to emergency cash when choosing a time period from when you want to be covered. In most cases this period is 30 days, however we see many 90 day, and even 12 month waiting periods taken out , with these clients basically looking to self-insure
the short term, but cover the long term unexpected event. Getting approved by an insurer is not automatic. You need to tell your insurer anything that could affect their decision to insure you when you are applying for, renewing or changing a life insurance policy. You also need to tell the life insurer about things that have happened between the time you apply and when the insurance cover starts. Some insurance companies need you to give them details of your medical history. If you don’t have this information, you can get it from your doctor. The insurer may refuse your claim if you don’t give them this information, and this could affect any life insurance you apply for in the future. The income protection payments you receive from a successful claim will be for the period you are unable to work, in line with the policy. Income protection gives you a steady source of cash in case you get injured or sick and cannot work. This means you can focus on getting better and not on how you’re going to pay the bills.

When it comes to your business, it’s best not to play the odds. Your livelihood and the value of your business is at risk which are just too important to bet against. See your accountant for more help.

Written by Chieftains an accounting firm that exists to help business owners increase profits and reduce risks allowing them to astutely provide for their retirement.

This article is for guidance only, and professional advice should be obtained before acting on any of its contents. Neither the publisher nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication. Liability limited by a scheme approved under Professional Standards Legislation.

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