When planning to take out income protection insurance, many individuals have trouble deciding which plan would suit their requirements the best. They are not able to decide the amount that their household needs for functioning stably and for how long will they need this amount.
Here, we are going to take you through the maximum amount that your income protection will pay out and how various types of income protection policies work.
Short-term Income Protection Insurance
When you take out a short-term income protection policy, it usually pays out for the coming year or two, depending upon the contract. This payout starts after the end of the deferred period and lasts till the term of your policy ends.
The amount paid out can vary from 65% of your pre-tax income to 70% of your gross earnings. Though 70% cover is rare, it is certainly beneficial for those individuals who have just started a family.
Long-term Income Protection Insurance
When you are looking for long-term cover that will payout income protection for a lifetime or until you retire, you can expect the maximum cover of 65% of your annual income. However, this maximum cover is pretty rare and most common option here is 55% of the gross earnings.
So, to be on the safer side and you can opt for insurers who are offering 50-55% cover on your pre-tax salary. This will ensure that you will receive competitive premium pricing. Plus, there is always a possibility of receiving extra cover if you are willing to pay a higher premium.
Business Income Protection
If you are self-employed and own a limited company, you can take out income protection insurance for a cover of as much as 80% of your annual income. This is a company owned plan, which is also paid for by the company. So, any liabilities and claims arising against the company have to be paid for through the proceeds of this policy.
Do you really need Maximum Income Protection Cover?
The cover you receive from the insurance company is directly proportional to the premium you are expected to pay, i.e., the higher the cover, the more premium they will charge from you. Therefore, the insurance companies make you think that you will require maximum cover.
However, you only need to cover your necessary expenses like groceries, utility bills, insurance premiums, mortgage installments, tuition fees, etc. through your income protection. So, if your expenses amount to 2,000 Euros every month, there is no use paying premium for a cover of 3,000 Euros. This will only over-burden your current financial obligations.
Cost of Income Protection
Like other insurance policies, the cost of income protection is the premium you are required to pay on a scheduled basis. The regular payment of premium ensures that you will receive the policy benefits when you qualify for them. For deciding the premium of the policy, the insurance company takes your age, health, lifestyle, cover, deferred period, and duration of cover into account.
The more favourable the contract is for the insurance company, the lower will be the premium they charge. For instance, if the deferred period is of 12 months, the insurance company will charge you less because there are cases when the insured individuals recover within that period and the need for payouts does not even arise.
Even if you are regular with the premium payments in the beginning, you should maintain the streak as you start receiving the payouts too. This is because if you discontinue to pay the premium, your policy might end, requiring your to renew it.
While renewing the income protection policy is not a lot of hassle, the premiums charged after receiving the payouts once might increase. Therefore, the budget that you prepare for the amount of cover you require should cover your insurance premiums as well.
When Do You Need Income Protection?
If you are a salaried employee, self-employed, or a freelancer, you should have an income protection plan in place to meet with future contingencies leading to inability to work. Then again, if you think that it is an added financial burden on your current income, check if:
- Your employer’s benefits already cover you against inability to work or provide income protection on their end. This will ensure that the organisation you are working with helps you cover the expenses while you are out of work and you don’t have to pay for it explicitly.
- You have a health insurance cover or insurance against mortgage that will provide for your expenses in case of loss of income.
- You have enough savings to last you the term when you are not able to work. However, it is not recommended to rely on savings for expenses that can be covered by insurance because savings can be used for other expenses which cannot be paid for through any other medium. And, if your illness goes out of control and insurance is no longer able to cover it, you will need your savings.
Will Income Protection Cover you in all Circumstances?
A number of individuals are sceptical about taking out income protection insurance policies, and rightly so. This is because there are certain clauses in income protection plan that unfold once you have made up your mind. Then you feel betrayed by the insurance company. Here’s exclusion and terms which you need to know beforehand.
- Critical illnesses running in the family heredity are not covered by the insurance company. They do a family health history check before drafting the agreement for the same.
- Pre-existing illnesses are seldom covered by the insurance policy. Even if they are, the insurer will charge you a handsome premium for the same.
- The policy will only cover you when you are not able to work and make an income at all. If you do have other sources of generating a respectable income, the payout is not passed.
- If you were fired and that leaves you unemployed the income protection is not liable to cover your expenses.
The Bottom Line
There you have it! The income protection policies are meant for critical illnesses and injuries that you encounter after taking out the policy. And they can cover up to 65% of your annual income if you are regular with your premiums.