When things are going well and we are fit and healthy and well, the last thing that we think of is falling ill. Most people assume that it is never going to happen to them, and if they do get sick, then it will only be for a very short period of time and they will bounce back and be back at work and life again quickly.
Unfortunately, things don't always work out like that. Moneyworks currently has at least four of our clients on permanent long term income protection insurance claim as they became unwell, and their conditions were such that they were unable to concentrate at work and hold down a brain driven job, or were physically unable to do the physical aspects of their job.
When we prepare a financial plan - to help our clients get to and through retirement, one of the most important things to consider is 'what will happen if you are unwell and unable to earn your income'. If you can't earn your income this will impact on your ability to continue paying the mortgage, even to be able to continue providing for day to day costs, and of course, you won't have the ability to save funds for your retirement. Of course, if you don't have any debt, have a freehold home and have all your money saved to live off in retirement, you probably don't need income protection or trauma insurance.
According to the Financial Services Council only one in five people in a survey considered a loss of income because of illness or injury to be a risk even though 2/3rds of the people in the survey said that they would have a moderate to high risk of financial problems if they suffered a serious injury or were unable to work. But of course - we think about the risk of earthquakes and fires and the impact that an event like that would have on our property.
There is a big difference in the quality of income protection insurance available - from the policies that you might buy when they send you a brochure - where the fine print says that they will 'underwrite you at claim time' (which means that you may not be covered for any known or unknown pre-existing conditions) - to the Rolls Royce income protection insurance, that pays your benefit in advance when you have had your wait time completed, and has many additional benefits including assistance to retrain and get you back to work. Some leading employers also provide income protection insurance cover as a staff benefit - it may have a 2 year benefit period - (we always recommend that you aim to have income protection insurance that will pay you a benefit until you are better or reach retirement age), but that is the expensive part of the cover- the first two years of a claim. Insurances like Mortgage Repayment Insurance also fall into the same category as Income Protection insurance.
But why do so many people not insure their income when it is their biggest asset? Your ability to earn an income will most likely be worth more than your home. As an example, if you earn $80,000 pa, and you are aged 40 - that is $2,000,000 of future income that will vanish if you find yourself in the same situation as our clients who are no longer able to generate an income.
Not everyone is able to get income protection insurance - your occupation might be too risky, your income might be too variable, you might not work enough hours. If that situation applies to you, we strongly recommend that you consider the partner insurance - which is trauma insurance cover - where you don't have to have an income to provide you with an insurance benefit if you become sick. Please note that trauma insurance is different to health insurance. Health (or Medical) insurance provides you with money to pay your medical treatment bills - trauma insurance provides you with a lump sum payment when you are diagnosed with one of the stated conditions.
A recent article in the NZ Herald called 'Why we insure our cars but not our income' [Tamsyn Parker] made some good points.
Yes, in New Zealand, we do have the ACC scheme, which will provide you with replacement income if you have an accident. However, some important things to note about ACC are:
- There is a cap on the amount of income that they will cover at $140,000
- The definition of 'accident' is based on a legislative definition and can regularly be different to what a reasonable person would consider to be an accident.
- A common reason for ACC declining claims is the assertion that the injury happened as a result of 'wear and tear'.
- ACC are very active in moving people off claim - sometimes before they are ready to return to work.
- ACC works in conjunction with your income protection scheme and the providers work together to pay your benefit and to get you well enough to get back to work.
- ACC does not cover illness, cancer, stroke, and many other conditions that a good income protection insurance policy does.
Why don't we put in place insurance to protect our future income against illness?
- Too hard - don't like thinking about it
- Haven't even thought about it
- Don't know how to go about doing it - but we will get around to it some day
- Too expensive. As mentioned above there are a range of different covers and there are ways to reduce the cost - but you will be reducing the potential benefits. You can take a longer wait period until the insurance policy starts paying out - but you need to be sure that you have enough sick leave, annual leave and emergency cash to live off until the insurance policy starts paying. You can insure a lower benefit than you are entitled to if you think you can live off a lower amount if you are unable to work. You can take a shorter benefit period - but you need to weigh up the fact that if you have been off work for 2 years or 5 years already, then you are probably going to find it quite difficult to return to work, as you will have been very unwell.
If you want a review of your existing insurances, or want to find out more about how income protection insurance might work for you - contact us by emailing email@example.com.