Loss of income insurance: Case Study

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Loss of income insurance: Case Study ... continued from above

She gave little thought to protecting her income against illness or injury until a friend recently was diagnosed with breast cancer and was unable to continue working.

Fortunately, her friend had taken out income protection insurance. Six months down the track, she is still receiving a regular payment which is helping her and her family to meet the cost of her medical expenses and a mortgage.

This episode made Rebecca rethink her own circumstances. Once her savings ran out, how would she cover her mortgage? And her car payments? Who would pay for her food and utilities? And any medical bills that were not covered by her private health fund or Medicare?

Rebecca contacted an insurance broker, requesting several quotes on a policy that would pay up to 75 per cent of her average gross monthly income.

To make the premium more affordable, she elected to have a longer waiting period of three months before the payment took effect because she would have enough in the kitty to cover her costs during those first few months.

The broker informed her that she would actually have to wait a further 30 days before her payment kicked in because she would be paid a month in arrears. Rebecca crunched the numbers again and found she couldn't string out her finances for an extra month so opted instead for a 60-day waiting period.

The broker then asked about her age, her health, whether she was a smoker, her occupation and the length of time she wished to be insured. Rebecca elected to be covered until the age of 65 and stressed that the policy must be guaranteed renewable; that is, once she took it out, it would be renewed every year regardless of her health. She also asked that consumer price index increases be factored in.

One of the key features of an income protection policy is a total disability benefit. Examine the definition of this benefit closely to ensure it matches the cover you require.

There are also two distinct types of policies: agreed value, where the amount of cover agreed to in your application is guaranteed for the life of the policy; and an indemnity contract, where the benefit to be paid is determined at claim time and is based on your level of income at that time.

If Rebecca were in a relationship, she might not need income protection insurance, particularly if her partner was not dependent on her income.

However, if you are self-employed and single with no sick leave or are in a relationship where your income is essential to meet commitments, then income protection is definitely worth considering.

Most insurance companies will have application forms that will ask about your medical history. Most will ask permission to contact your doctor to confirm your details.

If there are any issues, you may be required to have a medical. If you have a particular problem, the policy can exclude claims for that condition.

Within an hour, Rebecca's broker had provided several different quotes. She opted for a tax-deductible premium of $1466 a year. In the event of a claim, she would receive $3125 a month, enough to cover her mortgage and her bills until she could return to work again.

Reader comments about this article
By William O'Brien
Serious issues which have never really generated much thought previously due to ignorance of the reality of it all !
By Sandy Gallop
I have income protection insurance and when it came to the crunch of claiming - there is no time limit on the claims process to take place - a factor they do not count in this article when calculating how long you should have your eligibilty period for if you can afford to live off your savings. Be Aware.
By Ines
simple, yet informative case study identifying key components of income insurance that need to be considered. Many thanks
By Dallas Achilles
Can a 70 year old self employed person take out insurance to cover loss of income during atemporary illness?
By June Hood
I am currently doing research on what types of insurance I will need when starting up a small business. The above article was extremely useful to me inasmuch as many of Rebecca's business circumstances are the same as mine. I now know what insurance I must have right from the start of my business. Many thanks
By graham
even though my super policy has this insurance built in i am in the process of getting quotes for this type of cover and talking to my investment adviser as it may be to my financial advantage to separately insure both disability and life thus increasing the level of funds in my super account
By Elizabeth Dixon
I have been thinking of taking out income protection insurance and after reading the case study I will be obtaining various quotes to help in my decision. It is easy to just go along in life thinking oh, that wont happen to me but it is quite obvious that it could happen to anyone and very frightening to imagine what life would be like without your usual income, thanks.
By Financial Services Online
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