Key features of Income Protection Insurance

May 9 • Finance • 1418 Views • Comments Off on Key features of Income Protection Insurance

Income protection insurance (or salary continuance) pays a monthly amount when one is unable to work due to illness or injury. The purpose of income protection insurance is to provide with a regular income to meet expenses, which will then allow one to focus on their recovery. Income protection policies are very flexible and range from basic cover through to policies that provide home care benefits. The financial adviser can help determine the appropriate policy for needs.

Most income protection policies pay up to 75% of salary. The reason why the policy covers 75% of salary and not the full amount is to provide with an incentive to return to work.

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Most insurance policies offer a waiting period of between 14 days to 2 years before benefits become payable. One needs to be aware, however, that most income protection policies pay in arrears. This means if the policy has a 30-day waiting period, one will not receive an income payment until day 60. If there is an increase in waiting period from 30 days to 90 days, which will decrease the premium that is payable, one will have to fund living expenses for an additional 60 days. If one has a large amount of sick or annual leave this can be used to fund the living needs during the waiting period, but if someone doesn’t have a large amount of leave or a cash reserve, he/she should think carefully before increasing the waiting period.

Some income protection policies contain an accident option which reduces the waiting period for an accident, but not an illness. This reduces the waiting period and may back-pay the benefit from the time of first consultation with the doctor. In real time this can often mean the policy holder gets first payment in 30 days from the time he/she saw the doctor following the accident.

There are three main types of income protection policies:

  • Hours based policies: These policies pay benefits if one is unable to perform the regular duties, but will still allow to work up to 10 hours per week without reducing the income received.
  • Duties based policies: These policies pay benefits if one is unable to perform one or more of the regular duties of their own regular occupation. ƒ
  • Loss of income based policies. These policies pay benefits if someone suffers a loss of the majority of their income (usually 80%) as a direct result of your illness or injury.

For How Long will it pay?

The amount of time for which the income payments are received is known as the benefit period. The most common benefit periods are 2 and 5 years, or it may make arrangements to have benefits payable to age 55, 60 or 65.

While it may be tempting to take the shortest benefit period, but one should need to consider what to do if they were seriously injured and were unable to go back to work. By using a combination of insurances they may be able to overcome this issue.

Does one pay tax on the money?

For income protection insurance policies, the tax liabilities depend on the country of the policy. Most of the countries ask for tax on such policies as they see this money as personal income, and therefore it will need to be declared in the tax return. It will be taxed according to the marginal tax rate.

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