Income That Works When You Can't
Sydney Morning Herald
Tuesday June 24, 1997
IF you haven't got income protection insurance, this is a good time to think about buying. The premiums are tax-deductible, which means you will get almost half your money back if you are on the top marginal tax rate.
But you still need to shop around.
As the accompanying comparison shows, the cost of this insurance varies widely between insurers and it is crucial to obtain several quotes before signing on the dotted line. We selected six occupations for the purposes of the survey and asked seven insurers for their best available premiums.
Income protection insurance (also known as disability insurance) pays you a monthly benefit, usually 75 per cent of your gross income, if you are disabled as a result of illness or injury. If after a period of disability you can only work part-time, the insurer will make up the shortfall between your reduced pay and the amount you are insured for.
"The product provides income replacement so that you can pay the mortgage and maintain your standard of living," says Kathy Pacholok, manager of risk products at Mercantile Mutual.
Premiums are largely determined by age, gender, lifestyle, whether you smoke or not and your occupation. Professionals and white-collar workers, for instance, get more favourable rates than blue-collar workers because they are in less risky occupations.
Insurers usually base their premiums on their claims experience - that is, which customers are claiming how much - and this varies from company to company. One company may take an adverse approach to a particular occupation because of high claims (and therefore load its premiums) while another may view it more favourably. This is borne out by the results of the survey.
The blue-collar workers selected for the survey were given the most generous treatment by Mercantile Mutual. A panel beater who chose to insure with Merc was charged less than half that of the other insurers. In the case of the female courier, most other companies either refused to insure her, or did so on the basis it would only pay her claims for five years.
The policy offered by Prudential for both occupations was not guaranteed renewable which meant the insurance company could refuse to renew your insurance at any time.
As your income is your most valuable asset, you should ensure it is fully protected by any policy you select. Read the fine print carefully.
The policy should be guaranteed renewable so only you can cancel it. This means that, even if your circumstances change (for example, you switch from being a safe accountant to a lion tamer, or your health deteriorates), the company cannot cancel the policy or load the premium because of the increased risk.
Second, you should select a benefit period that extends to age 65, the age of retirement. In the event that you are unable to work again, the benefit should continue over the period of your natural working life.
Policyholders are offered a choice of waiting periods: 14, 30, 60 or 90 days. The longer you wait before claiming, the lower the cost. As disability benefits are paid in arrears, you need to take this into account when choosing a waiting period. So if you select a 30-day period, your first cheque will arrive 60 days later.
For the purposes of the survey, we selected a 30-day wait for the dentist and lawyer and a 14-day wait for everyone else. Two of the insurers, however, Rivkin Direct and Tyndall, offered only 30-day waiting periods. This should be taken into account as their rates appear more favourable than they should.
Peter Kell of the Australian Consumers' Association suggests building up a buffer of savings to tide you over a longer wait. "But you have to be realistic about how long you can wait. If you are self-employed and don't have annual leave and sick leave, you may need the benefit right away," he warns.
Debates rage about the definition of disability. However, the executive director of Rice Kachor Research, Mark Kachor, says: "Very few claims are disallowed based on the definition of disability. Rather, the consumer needs to be aware that there are three basic categories of benefit and they need to be aware which one it is they are purchasing."
The three basic categories amount to this. You are eligible for the benefit if:
n You are unable to perform your usual or normal occupation.
n You are unable to perform your usual occupation for two years, but after that any occupation for which you are suited by education, training and experience.
n You cannot perform any occupation.
"Make sure you get the category differences straight and then look at the bells and whistles," suggests Kachor.
But the general manager of sales and marketing at Australian Casualty & Life, Michael Browne, says definition is important. "You don't have to be as disabled as you did a few years ago to claim.
"Previously, you had to be unable to perform all the duties of your job to get paid; now you need to be unable to do just one of the duties of your occupation to benefit."
He says half the industry has the older definition and the other half the more generous variety and consumers should check this out.
Peter Kell wants to see key definitions standardised. "That is something the ACA is aiming for. It is simply unsatisfactory to have the same term which is a central part of the policy meaning different things with different companies. The definition of disability should have a bit more consistency so consumers can more easily compare products."
He says consumers should also be clear about what is meant by income. "Don't assume it's straightforward. Does it include fringe benefits like a car or only cash in hand?"
Since premiums do vary dramatically, shop around, says Mark Kachor. "The company that is good at age 35 may not necessarily be the cheapest at 50 for the same contract. Ask your adviser to tell you how a company compares if you were 10 years older but, remember, they are free to change their premiums."
Over the past year, premiums have gone up by 10 to 15 per cent in some occupations where claims have been an issue.
Kell says agents' commissions are still high and consumers should not be talked into expensive products by scare tactics. "Ask lots of questions and look for nasty surprises."
If your employer pays for your income protection, there is a continuation option which you can pick up yourself if you leave, but you have only one month to do this without going through the underwriting process.
Finally, once the tax deduction is included, the premiums cost less than 1 per cent of the benefit. "There are very few insurance benefits that you can get for that little," says Kachor.
Guaranteed renewable: When a policy can't be cancelled by the insurer.
Underwriting process: Having your insurance application judged by an insurance company.
QUESTIONS TO ASK
* What does it cost? Can I get it cheaper somewhere else?
* Is the policy guaranteed to be renewed?
* Will the policy pay me benefits until the age of 65?
* How long can I afford to wait before my first claim payment?
* Is the definition of disability broad enough?
* Are key definitions, such as what constitutes a disability and what type of income is covered, clear?
* What will the premium costs be in five or 10 years?
© 1997 Sydney Morning Herald