Secure your income for a rainy day

By JANINE OGIER


There are so many what-ifs to consider in financial planning that obvious things such as income can fall through the cracks.

It is easy enough planning to spend the income, but people assume getting it in the first place is a given.

Kiwis are generally optimists and few include the chance of serious illness or accident in their plans.

So people are often unaware of something like income protection insurance.

That's surprising, because it has been on the market here for years.

For Auckland insurance broker Ian Wallace, who is very experienced in this field, what's more surprising is that people easily accept the need for life insurance, but are statistically more likely to be disabled or ill and miss work for more than three months than to be killed or die prematurely.

So what is income protection insurance? Theoretically, everyone who needs their income needs to protect their ability to earn it.

Consider how long your boss will continue to pay you if you are off sick for a long time.

Or how you will pay your living expenses if you can't run your business.

Every year around 15 per cent of workers are unable to work for more than a month due to sickness or injury.

Health insurance can cover the medical bills, but it doesn't provide you with living expenses.

A policy can pay up to 75 per cent of your income if you are off work through accident or illness. It can cover the rest of your life if necessary and is inflation-adjusted.

Like all insurance, every policy is individually tailored and the premiums depend on individual circumstances such as sex, age, occupation, health history, how much cover you want and when you want it to kick in.

Being self-employed can affect the premium, as some insurers believe there's more chance of a stress-related disability claim because of the chance of business failure.

The ACC system means it is assumed a proportion of the accident part of income-protection insurance claims will be covered by the Government.

That will adequately cover a salaried worker for 80 per cent of their wage. But it's problematic for a self-employed person who income-splits to reduce tax liabilities.

While ACC only pays on income in your own name, income protection insurance can pay on provable income, including collective income if it is split for tax purposes only.

Plus it will take into account your whole package, including the extras such as superannuation, a company car and medical insurance.

There's even a way to insure more than 75 per cent of your income if you also take mortgage payment cover. One company, American International Assurance, allows you to combine mortgage and income protection cover above 75 per cent of your income.

You can make income protection insurance a catastrophe policy. For instance, if you think your savings/ business can tide you over for three months you can reduce your premiums by putting in a three-month waiting period. The usual waiting period is four weeks.

In the case of an accident, income protection insurance might not be claimed for the two years a person's income is covered by ACC, but kick in after that.

ACC deems full-time work as 30 hours including travel time. For an Aucklander with a long commute, that can be a realistic 22.5 hours on the job.

So income protection insurance can kick in at that stage to top up your earnings if you are not able to do a 40-hour week.

People find the money for home and life insurance, but if you'd miss your income, then income protection insurance is worth considering.

EXAMPLES

* A 30-year-old male office worker earning $50,000 takes a policy for 75 per cent of his income with a four-week waiting period. Monthly premium: approximately $60. At age 40: $70.

* A 30-year-old self-employed builder earning $60,000 takes a policy for 75 per cent of his income with a four-week waiting period. Monthly premium: $76. At age 40: $115.

* A 40-year-old self-employed businessman earning $60,000 takes a policy for 75 per cent of his income with a four-week waiting period. Monthly premium: $83. With a three-month waiting period: $45. With a six-month waiting period: $41.

* Janine Ogier is a Christchurch freelance writer