Income protection policies Providing for income loss

Press, 29 November 1989, Page 17

Income protection policies Providing for income loss

Sheryl Nicholls

MONEY Management

What would you do if you were one of the two out of every five people who suffers an illness or injury lasting longer than six months during your working life? Did you know that five out of every six disabilities results from sickness, or THAT one out of every six disabilities arise from accidents?

These figures are not figments of my admittedly fertile imagination, but are found in the 1986 A.C.C. BERL Report. On average each New Zealander has around a 7 per cent chance of becoming disabled through accident, — through sickness, around 33 per cent.

You will no doubt have some sick leave, or in those longer periods turn to the sickness benefit. The sickness benefit for those aged 18 and over is $8066 net per year. If the claimant is married without children it is $13,443 a year, and with children, $12,680 plus family support. However, income over $l4OO results in a reduction of 18 per cent.

A beneficiary can earn $2600 gross before the benefit is reduced, or if with children $3,120. The benefit is reduced by 30 per cent for income between $3120 and $4160 and by 70 per cent for income above that amount.

In the case of accident, most people look to the Accident Compensation Commission for support which will reimburse 80

per cent of pre-accident income. The A.C.C., however, excludes from cover accident through medical misadventure, all heart attacks and strokes.

Many New Zealanders are aware that the Gov-ernment-provided benefits are not broad enough, and so we are turning to a relatively new form of

insurance. This is a guaranteed renewable disability, or as it is sometimes called, an income protection policy which insures you for 75 per cent of your gross income. This allows enough to live on, continue any financial plan you may have, but encourages you to return to work to pick up that extra 25 per cent of your income.

These policies are cancellable only on non-pay-ment of premiums. So if, for example, one develops an illness that requires recurrent time off work, the policy holder is covered and paid out for each episode of illness.

Previous traditional personal accident contracts meant a policy holder could, for example, have angina develop and find that after the first claim his or her insurance company excluded cover for any claims of a similar nature, or in some instances cancelled the policy altogether.

If you intend to purchase one of these contracts there are several points to consider. Firstly, you will need to select the policy term — that is when the policy will expire, usually age 60 or 65 — and the benefit period. The benefit period is the period that a claim is paid over. The variations are, for example, two years, five years, or through to age 60 or 76. A good combination is usually a benefit period of 5 years (most disability claims are for less than five years) with a term through to age 60 or 65 (most longer term claims are of a recurring nature). The way premiums are paid can vary. Generally you will be offered “stepped” or “level” premiums.

Stepped premiums increase with age — annually or five yearly. Level premiums do not increase at all, and are therefore initially more expensive. Some companies will

offer a higher premium in return for the policyholder receiving a tax free lump sum on maturity of the policy. I am yet to be convinced this is a good way to obtain a tax free lump sum.

Policies are rated according to the risk level of each occupation. Income, qualificactions, and sex are also a factor.

Broadly speaking there are two definitions; that you cannot perform your usual occupation — usually reserved for the low risk group — or, that you cannot perform any occupation for which you are suited.

Generally, insurance companies load premiums for women by 50 per cent and upwards. They claim that women are off work more often and for longer periods — through illness or accident — than men. something I and many other women hotly dispute! Interestingly, a recent discussion with a leading underwriter gives some support to my theory. During two years or so (a very short actuarial period), on volume they have had more claims from women, but the claims from the men are costing more. To be fair, some companies will rate women equally with men but only in the class 1 or A, that is the low-risk category. Premiums are, of course, reduced for non-smokers.

Unlike the old accident and sickness policies, these contracts have a waiting period. This is the period for which you are not covered. These range from 14 days through to three months. A longer waiting period will give you a lower premium.

These policies can also offer inflation proofing both by increasing the cover each year and by increasing claim payment usually by the Consumer Price Index.

One of the most important factors in these policies is the definition of disability.

Many policies will also offer cover if a policy holder has a partial or residual disability. Most companies wil also offer extra options such as lump sum benefits, for example, compensation for loss of limbs or bodily functions, cover overseas, hospitalisation benefits, and rehabilitation benefits.

If you intend to purchase one of these policies it is important to shop around. Companies can vary ratings for the same occupational class which can make a considerable difference in premium.

Remember also you generally have only so many dollars that can be allocated to protecting yourself. Statistically speaking you are more likely to retire, become disabled, or die — depending on your age of course!