Income Protection Insurance: Factors That Affect Its Cost

Income Protection Insurance: Factors That Affect Its Cost

In these times of financial uncertainties, protecting one’s income against illnesses, injuries or disabilities is a very smart and lucrative strategy to do. As you will be unable to work as you recover from your illness or injury, having income protection insurance would provide the assurance that you’ll be receiving a steady income that’s similar to what you are earning.

What is Income Protection Insurance?

Income Insurance is a type of insurance policy that is designed to pay a tax-free monthly benefit to policyholders who are incapacitated and hence are unable to work due to illnesses, accidents or disabilities. Although, there is no actual list of events that it stipulates by which you can claim insurance. Essentially, it is anything that causes you to stop from working. It is considered as one of the best types of insurance, particularly with working people, as it gives the policyholders the freedom to focus on their recovery rather than worry about where the money is going to come from for paying their every day bills like mortgage, groceries or utilities.

How Much Does Income Protection Insurance Covers?

Generally, the maximum cover for this insurance is usually up to 75% of your gross income. However, the amount of coverage is determined by the salary you want to insure. That’s why you need to consider how much income protection you require, factoring in the costs of meeting a mortgage and other debts, paying every day bills and utilities, providing for a spouse, children or other dependents, as well as the maintenance of your assets and investments. Remember, the point of having this insurance is the guarantee that you will have income stream in times when you’re temporarily unable to work.

The length of coverage (the time you will receive payments) will depend on the contract term. This could be: for the entire time when you are incapacitated and thereby unable to work until the earliest of death, recovery of health, retirement or the term of the contract. You will receive payments regularly (usually weekly or monthly) and are free of tax.

How Much Does Income Protection Cost?

The cost of this insurance varies based on a range of factors namely:

Your Occupation

Profit-wise, any potential customers are ranked by insurers on the basis of how likely they are to claim in their line of work. Different insurers have their different ideas about what occupation entails more risks than others.

Low risk occupations are in all likelihood subject to lower premiums. This involves people whose jobs involve little to no manual work like administrative staff and managers. On the other hand, high-risk occupations, including manual workers and both skilled and unskilled, are likely to be subject to higher premiums. This is so because skilled manual workers work with heavy or dangerous equipment that naturally place them at higher risk of injury.

Your Annual Income

A buyer may have to pay 1%-3% of his annual income on premium though it depends on the policy chosen by the buyer. A buyer must declare all components of their income if they want to get a correct estimate since income protection covers are tax deductible.

Deferred Period/Waiting Period

The longer the waiting /deferred period chosen, the lower the premiums you have to pay. So, if you can financially survive for a longer period while unable to work and without your income protection paying out or you are eligible for a generous sick pay from your employer, then it is advisable that you select a longer deferred period, that is as long as a year.

However, if you see that you cannot manage without your payments, opt for a shorter deferred period, for as short as four weeks.

Age and Gender

Due to the fact that a person’s body naturally deteriorates as one gets older, an older individual in all likelihood will pay more as compared to a younger counterpart in the same position.

Insurance companies will perceive an individual in their fifties as a greater risk and thus, they can expect to pay more for their insurance.

Likewise, a person’s gender can also affect the amount of premiums. Women are likely to be subjected to higher premiums than men. This due to the fact that women are said to claim on income protection insurance more than men, and are supposedly more likely to retire early and take time off to care of children or relatives.