Understanding Income Insurance Terms

Income insurance, also known as income protection insurance, is a crucial safety net for anyone who relies on a regular income to cover living expenses. It provides financial support if you're unable to work due to illness or injury. However, understanding the various terms associated with income insurance is key to choosing the right policy. This guide will help you decode the essential income insurance terms, ensuring you make informed decisions.

1. Income Protection Insurance

Income protection insurance is a type of insurance that pays a monthly benefit if you're unable to work due to illness or injury. Unlike life insurance, which pays out upon death, income protection helps cover your living expenses while you're still alive but unable to earn.

2. Benefit Amount

The benefit amount is the portion of your income that the insurance company will pay you if you can't work. This typically ranges between 75% and 85% of your pre-tax income. It's important to note that the benefit amount is usually calculated based on your earnings before the injury or illness.

3. Wait Period

The wait period is the amount of time you must wait after becoming unable to work before your income insurance benefits begin. The most common wait period we see is 4 weeks (30 days) but can go up to 52 weeks and more. Choosing a longer waiting period usually results in lower premiums, but you'll need to have sufficient savings to cover expenses during this time.

4. Payment Period

The payment or benefit period is the length of time your income insurance policy will pay out if you can't work. Benefit periods can range from a few years to up to retirement age of 65. A longer benefit period provides more extended protection but may come with higher premiums.

5. Agreed Value vs. Indemnity Value

• Agreed Value Policy: In an agreed value policy, the benefit amount is agreed upon at the time of application, based on your income at that time. This amount remains fixed even if your income decreases later.

• Indemnity Value Policy: In an indemnity value policy, the benefit amount is based on your income at the time of your claim. If your income has decreased since taking out the policy, your benefits may be lower.

6. Occupation Class

Occupation class refers to the categorization of your job based on the risk associated with it. Insurers in New Zealand classify occupations into different classes, with higher-risk jobs often attracting higher premiums. For example, a desk job might fall into a lower-risk category, while a construction job would be higher risk.

7. Total Disability

Total disability means that you're unable to work in your usual occupation due to illness or injury. Different policies have varying definitions of total disability, so it's crucial to understand how your insurer defines this term. Some policies may require that you're unable to work in any occupation, not just your usual one.

8. Partial Disability

Partial disability means you're unable to work full-time due to illness or injury but can still perform some duties or work part-time. Income insurance policies often include partial disability benefits, which provide a reduced benefit amount proportional to the reduction in your working capacity.

9. Stepped vs. Level Premiums

• Stepped Premiums: Stepped premiums start lower and increase each year as you age. They can be more affordable initially but become more expensive over time.

• Level Premiums: Level premiums remain constant throughout the life of the policy, which can make them more cost-effective in the long term, especially if you plan to keep the policy for many years.

10. Exclusions

Exclusions are specific situations or conditions where the insurance company will not pay out benefits. Common exclusions in income insurance policies might include pre-existing medical conditions, self-inflicted injuries, or disabilities caused by high-risk activities.

11. Offset Clause

An offset clause is a provision in some income insurance policies that allows the insurer to reduce your benefit amount if you receive income from other sources, such as ACC, social security benefits, sick leave, or other insurance policies. It's important to understand how this might affect your total income in the event of a claim.

Conclusion

Income insurance is a vital component of your financial safety net, offering protection if you're unable to work due to illness or injury. By understanding these key terms, you can better evaluate your options, choose the right policy, and ensure that you and your family are financially secure, even in challenging times.

Glen Hatcher
Financial Adviser
New Vision Financial Services

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