Income protection plans can provide you with much needed protection. However, there are some key features you need to understand when buying these polices. We explore some of the common features here.
What does my policy cover?
The policy will generally pay you a regular income until retirement age if you are disabled and cannot work. However, insurers have different definitions of disability. The 3 main definitions are based on:
- Your ability to do your own job: This is the most comprehensive cover as the policy will pay out if you are unable to do your current job. It also tends to be the most expensive.
- Your ability to do any job: This type of definition is harder to meet as the insurer could decide that there are other jobs that you can do, even if your disability stops you from doing your current job. You only receive a payout if you cannot carry out any work.
- Activities of daily living: This involves undergoing tests to determine if you can carry out activities that an ordinary person would around their home. These activities include bathing, eating, and going to the bathroom.Although this definition is objective, it may still be difficult to meet. A person might suffer from a psychological disease that means they can do all the activities of daily living on their own, but they are still unable to work.
Some policies may have a mix of these definitions. For example, in the first year, definition one is used and thereafter, definition two is used. It is important to know what definitions your policy has, as this will determine if you are able to claim.
Does the policy replace all my income?
This is not always the case. Most policies (especially those provided by your employer) will pay between 75% – 80% of your income. Although you can have more than one policy, the law limits the total payout from these policies to 100% of your income when you claim.
Standard policies do not make allowance for the annual salary increases or the bonuses you would have received if you’d continued working. Some insurers will have these as options that you can choose to enhance your policy.
How are my benefits taxed?
You will not pay any tax on the benefits as the premiums that you pay are from after tax income.
Will my policy start paying as soon as I claim?
Most policies will only start paying out a few months after you are disabled. This period is called a waiting period. On an individual policy, you can choose not to have a waiting period. On a policy provided by your employer, the waiting period is chosen for you (it can also be zero months).
Usually, this waiting period is chosen to align with other benefits that you may have e.g. if your employer pays sick leave for three months, the waiting period may be chosen as three months.
There are many more things to consider when choosing such a policy. We encourage you to consult with a financial advisor for advice tailored to your specific situation.