Does income protection work?

Does income protection work?

Interesting question, up there with what's the best value income protection?

The answer to both questions is a good quality income protection solution. It will both work at claim and give you great value as a result. The way to do this is talk to a good adviser who will arrange this for you, that's me.

If you mean best value equals cheapest premium, then you have to ask the question do you expect to claim? If not, why have it? Cheapest like most things in life usually translates to inferior.

I could arrange for you an income protection policy that is 20-30% of the cost of a good policy, the monthly benefit amount would be the same, but other conditions probably wouldn't suit.

What I'm talking about is the structure of cover.

Let's say you need $5,000 per month. 

So on the real cover we've decided you need to have cover until age 70 and you need to have funds paid with an 8 week wait. I would setup a policy with an 8 week wait and both claim period and policy term to age 70. If we pushed the wait out another 4 weeks it would probably still be manageable and would reduce premium further. This cover would be on agreed value which we have proven at application, so you have certainty of receiving the money you need at claim time without having to provision and pay for the effect of tax.

On the cheap cover, we've gone indemnity, prove the loss at claim time and you manage the tax. The policy term is renewable to age 70 but the payment term is 12 or 24 months, depending on provider, for a claim and the wait period is 13 weeks. The cover amount is also $5,000 per month.

On the face of it to you, both sort of feel the same. The big difference is the indemnity policy you have to prove the income at claim, for $5000 you'll have to be earning $6,666 per month minimum. You'll also have to pay tax on this. So problem no 1, you may not be able to claim the benefit you have paid for.

Agreed Value

With agreed value, this is proven upfront at the start, so you know what you're insured for and what you can claim. Because agreed value income protection works in this way, it's not tax assessable either. So more in your pocket for the premium you pay.

Policy Term

With the policy term we're talking about how long you can hold the policy, not how long you can claim for. This often confuses policy holders as policy term and benefit term aren't always that clear on insurance company communications. In both cases for this example it's to age 70 which is fine as it takes you to/past expected retirement age.

Payment Term

Problem no 2 arises from the benefit payment period, ideal cover would pay you if you were disabled all the way through to age 70, regardless if this was one claim or multiple claims for the same condition.

With the cheap cover the payment term of 2 years is the problem. With most insurers this is the maximum time they will pay a claim for a particular condition, regardless of it being 1 claim or many claims.

You might be able to hold your cover to age 70, but you can only claim on your back disability for a maximum of 2 years. Makes it a challenge if you have reoccurring problem or one that takes longer than 2 years to recover from.

People often comment, 2 years or 5 years that's all I'll need. I hope so, actually, I hope you don't need it at all and its a complete waste of money. Thinking about it, that's the best answer for you. The reality can be quite different 

Major disability, then what?

So you're disabled, something major, life changing and you have a 5 year cover. That gets you through the first 5 years of your shiny new 30 year Auckland mortgage, after that then what? You can't work, you'd be back at work already, now what are you going to do to pay the bills?

Ok you might have TPD cover for the mortgage, though unlikely as the income protection has been limited. Let's say you do and you pay the mortgage off, you're totally permanently disabled, so you're not going back to work. How are you going to pay the rest of your bills, food, rates, fuel. electricity, water, etc...?

Ok to be fair I'm probably laying it on a bit thick, but the reality is you need to plan for the worst and hope for the best. Hope for the best people do naturally, planning for the worst not so well. Optimism often blinds people to the serious risks they do need to consider.

For Example

A recent client we came across had had a fainting episode, followed by a head injury and diagnosis of a previously undiagnosed heart condition. An unfortunate run of events and conditions. The result is ACC isn't involved and 4 years on this client is still struggling with the effects. Good cover would have helped and supported, making life more livable and maybe avoiding some of the challenges financial strain create.

Why isn't ACC involved?

They were to start with, they helped with the treatment of the head injury and the initial rehabilitation. 

The challenge was the primary cause of the disability wasn't the head injury, it was the cognitive impairment brought on by the medication for the heart condition. Neither the medication side-effects or the heart condition are covered by ACC, so they stepped back. This is where the income protection and the good adviser I mentioned earlier comes in. 

In this situation the client wasn't in a position to stick their hand up and say I need to claim, they were dealing with their situation and it involved cognitive impairment which makes it all even harder. What was needed was their adviser to keep in contact so they could identify there was a problem and act on their clients behalf. 

P.s. If you have an existing adviser and they're annoying you with lots of contact, they're probably one of the good ones and they're doing their job, looking out for you!

Unfortunately in this case their adviser didn't, even when there were obvious warning signs they still didn't act.  

What ended up happening is this client waited on a waiting list for two years before someone asked the question about medical insurance. Fortunately this was still there and able to be claimed on. This cover paid for the heart surgery required but lapsed due to non payment soon after.

What wasn't there was the income protection as it had also lapsed, also due to non payment, due to the client not being able to work. Funny thing is, income protection is there to pay when you can't earn. The issue here is the insurer had no idea they should have been paying a claim, because the adviser didn't keep in contact nor took the appropriate action when presented with the clients situation. 

Solution

We were called to arrange new cover, several years after all of this had happened. Once uncovering this situation knowing that new cover would have its challenges, our advice was to lodge a claim for the income protection with the previous insurance company and look at reinstating their cover under extenuating circumstances. Fortunately the disability situation was well documented and the insurance company is considering the claim and request. We'll see how far this goes, as the claim is several years old, but it is looking promising at this early stage. 

Does income protection work?

To answer the original question simply, yes income protection works, provided you have a good adviser who arranges good cover suitable to your situation. If you're looking for cheap it'll probably be nasty at claim time.

Get us involved

Want to explore your options for cover that works within your budget, give me a call.

Jon-Paul Hale

Written by : Jon-Paul Hale

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Physical Address:
5i Miro Place
Albany
Auckland

Email: enquiry@willowgrove.co.nz
Phone: 09 973 2849

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