When is the best time to take out income protection insurance?

Income protection insurance prevents you from being stranded, should you not be able to work.

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With your house, contents, car and life insured it feels like you are covered from all angles … but what happens if you fall sick and are unable to work? Income protection insurance may be something you've heard of in passing, but what does it cover, and what are the benefits of having it? Is it time to start thinking about taking it out for yourself?

What is income protection insurance?

Should something happen that stops you from being able to bring in an income, this insurance can cover you up to 75 per cent of what you've been earning. The difference between income protection insurance and ACC is that ACC only covers you for accidents. Should you become too ill to work, or suffer a trauma and require long-term care, ACC wouldn't apply. Instead, this is where an income protection policy would kick in.

When is the best time to take out income protection insurance?

Any time that the loss of income would leave you unable to pay your bills and support yourself. If you have a mortgage, have to pay rent, or a family relying on you, income protection insurance is especially important. You may want to consider life insurance as well

There are a lot of benefits to income protection.Talk to your insurer about whether an income protection policy may benefit you.

There are generally two different types of income protection policies, and each have different tax implications and benefits. 

  • Agreed value policy: With the insurance company, you'll decide on an agreed amount for monthly payments. This is particularly useful if you're self-employed. Earnings can fluctuate over time, or you might be keeping your income artificially low. When applying for this policy it is likely that you'll have to provide evidence of what you are earning at the time. Premiums will not be tax-deductible, but the benefit is that you won't have to pay tax on your claim.
  • Indemnity policy: This policy covers a set percentage (usually 75 per cent) of your income. Depending on the details agreed on, it will either be based on the last 12 months of your income, or the best 12 month period from the prior three years to you making the claim. A benefit of this policy is that your premiums are tax deductible. However, you'll have to return the claim as income.

Talk to your insurer about waiting periods, and the length of cover, as they both impact a policy's premium. The waiting period is the amount of time that will need to pass before your policy begins making payments. Cover can last a fixed time frame, or extend all the way to retirement.

If you need to know more about how a income protection policy may benefit you, reach out to us at Money Empire.

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