Income Protection and Mortgage Repayment Insurance

Income Protection – what does it cover, how does it work?

At Moneyworks, we are regularly asked how income protection insurance cover works.
As an essential personal insurance, it is important that you understand how it works for you.
We have covered some common initial questions below.

How is the cost of income protection insurance calculated?

This depends on a number of variables – most of which you can’t manipulate – as you need to tell the truth. Factors that are taken into account are:
  1. Your age
  2. Whether you are male or female
  3. Whether you are a smoker or a non-smoker
  4. Your occupation
  5. Your income
  6. Your wait period and your benefit period (see notes below)
  7. Which insurance company you choose to use

What is the income protection insurance wait period and how does it work?

This is the time period that you believe you can survive financially without the benefit being paid from the insurance company. Traditionally this will be four weeks, eight weeks, thirteen weeks or twenty six weeks.

For some people, 52 weeks (1 year) or 104 weeks (2 years) might be relevant, if their employer already provides cover for that time period (sick leave or an existing income protection insurance policy with that benefit period).The longer that you can afford to wait before the benefit is paid to you – the lower your premium will be (but 13 weeks and 26 weeks aren’t usually that different in cost).

The factors that you will take into account are how much sick leave you have, how many cash reserves/investments you have that you wish to use and how much other income is coming into the household, when deciding which wait period is suitable for you.

What is the income protection insurance benefit period and how does it work?

This is the time period that the insurance company will pay you the benefit – either until you are aged 65 or until you are better. You can purchase a shorter benefit period – till age 60, or for 5 years or 2 years, but in the last 10 years, at Moneyworks, we have only met one person where a short benefit period could be seriously considered.

Basically, if you are unable to work and need your income replaced for 2 years, or 5 years, you are highly unlikely to return to work after that time period, and as such, you will need your income paid until retirement date – age 65.It is vital to remember that insurance companies generally pay the benefit four weeks or a month in arrears, after you become entitled to it. Therefore if you have a four week wait period – you won’t receive your first payment for 8 weeks.

How do I work out what income protection insurance benefit is suitable for me?

For the majority of us, we need to protect the maximum available to us – 75% of our income. Remember, as the premiums on the policies that Moneyworks recommends are tax deductible, the benefits are taxable when they are paid.

However, every now and then, we meet someone who is saving a large amount of their income into investments, and who can genuinely live on a lower amount than 75% of their income after tax, if they are disabled. For most people though, the extra saving in premium is not worth reducing the benefit paid.

What happens when I go to claim on my income protection insurance policy?

We are concerned that some of our clients aren’t aware of the situations when they are entitled to claim on their policy. We would encourage you to contact us if you are ill or injured for any reason – for longer than four weeks. You never know whether there may be a benefit that you can claim on your policy – regardless of your waiting period.

For example – if you have been hospitalised for three days or more, regardless of your wait period, you may well be entitled to a ‘daily hospitalisation benefit’.If you have a ‘specified sickness benefit’ (AXA policies) – and you contract one of the specified sicknesses, you may be entitled to claim on the policy, even if you are still earning an income.

There are many other benefits on different policies – rehabilitation benefits being one of them – that might start paying you when you need it – not necessarily waiting until your wait period is completed.

When you claim on your policy, you need to be aware of the following things:

  1. Any income that you are receiving from other sources will offset any benefit that you are entitled to receive
  2. In general, if you are working more than 10 hours a week in your occupation, you are not considered to be totally disabled, and therefore may not be able to claim. (If your policy is not one arranged by Moneyworks, the definition may be different.)
  3. The income protection insurance policies recommended by Moneyworks do not cover redundancy. 
  4. You need to note any exclusions that have been put on your policy because of pre-existing conditions.
  5. If you had a pre-existing condition and you didn’t declare it, and you wish to claim for that condition – it is likely that your claim will be turned down.

What happens with ACC if I claim on my income protection insurance policy?

If you have an accident, and ACC assesses it under their criteria as an accident (not everything that we would logically think was an accident fit their criteria) – then any income payment that you receive from ACC will be counted as income, and there it will be offset against any benefit that you will potentially receive from your income protection benefit.

However, don’t forget that there are many other benefits on your income protection insurance policy – that aren’t provided by ACC. It is still worth lodging a claim on your income protection insurance policy – in case you can claim on a benefit. The other point to note is that the definition of income for ACC and income protection are not necessarily the same. Because of these different definitions, you may end up claiming for additional amounts on your income protection insurance policy.

Don’t forget, as we get older, we are statistically less likely to have an accident, and more likely to be ill and unable to work!

Why doesn’t Moneyworks recommend all income protection insurance policies available?

In our opinion, income protection insurance cover is the most important personal insurance cover that you will have in place. Therefore, you want to make sure that it will work for you when you need it the most – at claim time.

When we assess which policies we will recommend we look at a number of factors including:

 The insurers’ claim paying history and reputation (ie whether they are likely to try and ‘weasel out’ of paying your claim.)

  1. The insurers’ credit rating and likelihood of remaining in business for as long as you need your policy.
  2. The definitions in their policy of ‘income’, ‘totally disabled’ and a few other relevant definitions.
  3. The added benefits that they include in their policy – ie rehabilitation benefits, specified sickness benefits.
  4. Their historical policy on increasing premiums – compared to how cost competitive they are for your situation at present.
  5. Their attitude towards ‘underwriting’ – whether they will insure anyone anytime (which is generally referred to as ‘buying business’) or whether they have a more structured underwriting process. We want to make sure that they will still be offering income protection in the future – so the way they conduct their business is very relevant.

Claiming on your income protection insurance

Your income protection insurance policy is a vital part of your financial strategy. It is important that you review the policy that you have in place to make sure that it is the most suitable for you on the market.

It is also important that you are aware of the features on your policy and that you
use these benefits when you are entitled to them.

Particular benefits on your policy that you should be aware of are:

 Hospitalisation, Bed Care or Nursing Benefit
This benefit enables you to claim usually after you have been bed-ridden or hospitalised for three consecutive days. This is regardless of your ‘wait or stand down’ period. This is a benefit that our clients have found to be quite useful, when they are in hospital.

Worldwide cover
The good quality policies will cover you while you are overseas. Very few companies will actually provide you with income protection insurance cover if you are already booked to travel overseas for an extended period (ie to work), particularly if you are going to the Middle East, or say Papua New Guinea.

However, if you already have a policy in place, and you go to the USA or the UK for several years to work, the cover will continue. But you need to check with your Adviser whether this cover is available to you or not. Some policies will provide you with financial assistance to return home if you are going to claim on your policy for an extended time period.

There are many other benefits on the top quality policies, and the benefits differ greatly between different contracts. Your Adviser knows the details of your particular policy and your Client Service Manager and Adviser are there to help you to claim when it is appropriate.

The disablement process – how does it work?

No one can predict when you will suffer a serious illness or injury, but when you do, more than likely your health may gradually deteriorate before you eventually die.

For some people the process will be very quick – perhaps through a car accident or the sudden onset of a terminal illness. However, for most people, this is a gradual, but inevitable pr

It begins when you become:

Too sick or injured to work.
If you cannot earn an income, your lifestyle will suffer and you will be forced to make changes. You will probably find it more difficult to meet your living costs when you are disabled than when you could work.

This is the stage that your income protection insurance cover comes into effect. But remember, you will only receive 75% of your pre-disability income AND you will need to pay tax on that income.

Critical Illness and Major Trauma
Many New Zealanders are disabled by the same medical conditions – heart attacks, strokes and cancer. These conditions will mean time in hospital, time away from your family – and you may wish to have your life partner with you during your stressful diagnosis and treatment times.

What impact will this have on the household income, if your partner has to also take time off work. Trauma insurance provides a cash injection to assist you with juggling your financial issues at this time, and works efficiently in conjunction with your income protection insurance, to eliminate debt, and enable your partner to take leave without pay.

Permanent Disability
This is the stage, when you can’t go back to work. Your income protection insurance benefit will continue to be paid, but if you haven’t had a payment from your trauma insurance to eliminate your debt, you could still be handling your debt/mortgage, with the lower level of income that you are receiving from your income protection policy. There is a special insurance cover – Total and Permanent Disability insurance that is available for this stage.

Death
This is the final stage of the disablement process, and is inevitable at some time, but it is not something that anyone likes to dwell upon.Very few people die suddenly, without any warning. This is why it is important to put in place some life insurance coverwhile you are fit and healthy – to provide for your loved ones when you aren’t able to financially or emotionally support them any longe

Mortgage Protection/Repayment Insurance

Mortgage Repayment Insurance can be set up on its own, or in conjunction with other insurance cover likeincome protection insurance or trauma insurance. Your insurance specialist will help you to work out the best combination of cover for you.

Mortgage Repayment Insurance is designed to provide funds to meet your monthly mortgage payments should you be unable to work for a period of time due to illness or injury. An attractive feature of this product is that any other income you may receive while on claim (such as ACC) is not offset against your monthly benefit payable by the Insurer.

In most other respects it acts like income protection insurance cover.

You choose a wait period (generally 4, 8, 13 weeks), which is basically a period of time that you need to cover the mortgage payments yourself if you are unable to work due to illness or injury, before the insurance starts paying.

The insurance then pays a pre-determined (agreed value) amount of money each month, until you are better or until your benefit period expires. Your benefit period is the period that you choose – either 2 years, 5 years or until age 65.

Each different insurance cover will establish the maximum cover, but as a guide you can generally insure up to 110% of your mortgage payment. Some insurers have a maximum monthly amount that you are able to cover while other’s will simply insure your total payment.

This product can be great for a couple where if one person is unable to work then the joint mortgage payment is covered and you can generally cover the day to day living costs from the other person’s income who is still working.

For a single person or an individual (in a joint relationship) who earns the majority of the household income we would recommend that some form of Income protection policy is also taken out. After all is may not be very useful having your mortgage payments made if you are unable to pay other costs for Food, power, telephone etc..

It is important that you get advice on how to combine this insurance with other insurances to make sure that you get the right combination of cover.

How much Mortgage Repayment Insurance cover do I need?

This will depend on your personal situation. But the amount of cover that you should have will depend on a range of things, including:
  • How much is your mortgage debt?
  • How long can you afford to wait until the benefit starts paying you?
  • What other insurance cover you have or are putting in place

How do we help you with your Mortgage Repayment Insurance?

After talking with you, we research all the options available to you, to find the mortgage repayment insurance that is most suitable for you. This takes into account your criteria, whether that is best quality cover, or best cost cover for your needs.We then assist you to get that insurance cover in place with the least possible hassle to you.

After the insurance is in place, we will keep in touch with you, to answer any queries that you have about your insurance cover. If you have a claim, we are here to assist you with that process, to reduce the stress on you.

What do I need to be aware of with my Mortgage Repayment Insurance?

Your mortgage protection insurance policy will only pay out when you suffer a medical issue if:

  • Your premiums are paid and up to date.
  • You have disclosed everything relevant at the time that you apply for the mortgage protection insurance cover.

Any pre-existing conditions that you have will be excluded from cover.

Case Study – Mortgage Repayment Insurance

Jason decided to put in place a combination of Mortgage Repayment Insurance cover and Income protection insurance cover. When he was diagnosed with a TIA (transient ischemic attack – or simply a little stroke), he found that he couldn’t work for some time. He continued getting TIA’s and had to stop work as an architect.

After his wait period of 4 weeks, Jason’s mortgage repayment insurance of $3,000 a month fully covered his mortgage payments. In addition to this his income protection insurance paid a benefit of $6,000 a month. This enabled him to recover from his illness and be financially stable until he was ready to go back to work. The insurance policies worked together as he started back at work, by providing him with partial disability and recovery benefits.

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