Income protection: Checking the options

Being unable to work because of injury or illness can come as a big financial blow to people. How will you pay the bills or provide for your family? Fortunately, there is help available with income protection schemes which can provide monthly payments to households.

Executive Manager of Distribution for life insurance company Asteron, Graham Hill, says that when choosing an income protection scheme, consumers should look for a flexible policy.

“You can adjust the cover to suit your individual needs and, in most situations, people’s income will increase. You also want some flexibility around the ability to increase the level of cover within certain parameters, without the necessity of underwriting your health,” he says.

For self-employed people whose income can fluctuate, Graham recommends meeting with an adviser to talk through the various options.

“You want that assurance that if something was to happen and your income had reduced over the last 12 months, the amount of cover you get will match what your average income was over the last three years.” 

He also advises people not to rely on the Accident Compensation Corporation (ACC) to cover them. “The reality is that the majority of income protection claims are caused through sickness such as depression, heart issues and non-accidental back-related complaints. None of those would be covered by ACC,” he says.

In addition, Graham says consumers should read the fine print, as some income protections have limitations that exclude mental health conditions. “If you think about today’s society, I wouldn’t want those conditions excluded.”

Wait periods 

Another thing to consider with income protection is wait periods. If you didn’t have an income because of some illness, how long would it be before your household was financially stretched?

“Some people might be able to last a month, three months, six months or a year,” Graham says. “The wait period is the time you are prepared to self-insure. After that wait period, your income protection kicks in.”  

Level premium option

People should consider taking a long-term approach to income protection, Graham says. 

“Do you see yourself working to age 65? Because if you do, taking a level premium option would be a good consideration. This option levels out your premium over the period of cover. If you took this option at say, 35, by the time you get to 50 you are making some incredible savings in premiums.”

When talking to an adviser, people should ask if income protection is affordable for them. The adviser will present ideas around level covers and options for clients to consider as they get older.

“If you don’t take a level option, as you get older your premiums go up because the risk increases. Many clients have said they wished they’d considered level options years earlier.”