Income Protection – How Does It Work?

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Your employer may pay your full salary if you become ill as an employee. Employers must provide statutory sick leave for most employees up to 28 weeks. However, this will likely be much less than your full earnings. You would likely have to rely upon state benefits after that.

Some employers offer group income protection insurance as an employee perk. This can provide income for employees after the statutory sick period. You won’t be able to get this if you are self-employed.

State benefits are not generous. If you are disabled or sick, you will likely see a significant drop in your income.

Insurance is designed to help you get back to where you were before you lost your job. Insurance does not make you a profit from your loss. The maximum income you can replace with insurance is the after-tax earnings less any adjustment for State benefits. This means that you can replace between 50% and 65% of your pre-tax earnings.

Insurance:

Income protection insurance, also known as permanent insurance, pays a tax-free income if you are unable to work due to illness or disability.

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How to calculate how much coverage you need.

Anne is single, and her annual income is PS26,000 before taxes and any other deductions. According to Anne, her budget would be affected if she were seriously ill.
Anne’s budget calculations for the eventuality that she is unable to work.
Her estimates:

  • She would lose income – her take-home pay PS18,000
  • She would receive an income deduction of approximately PS4,000 for long-term incapacity benefits.
  • Anne will save on expenses – mortgage interest payments, work related costs, if you have mortgage payment protection insurance PS3,000
  • Add additional expenses she would have to pay, such as the cost of special equipment, treatment, or heating your home for longer periods of time.

Additional Income Required: $13,000

Anne estimates that she would need approximately PS13,000 per year to sustain her lifestyle. This is almost half of her PS26,000.

Anne works out that her employer will pay half of her salary for 52 weeks, after she has reached her 28-week statutory sick pay period. Anne arranges for her policy’s payout after 80 weeks of incapacity (see the waiting period below).

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For more information on how insurance protects you, see

Cost – The policy’s monthly premium is paid. The following factors affect the cost of insurance:

  • Your age at the time of the policy’s inception. Pay more for older people who are more likely to become ill.
  • The premium you pay can be affected by your sex and gender.
  • Your health at the time of the policy being started. You might have to pay more if you have health problems or are denied coverage.
  • Your job – Some jobs are more susceptible to illness than others. A bank clerk may be considered to be a safe job, but deep sea divers are more risky and would need to pay more.
  • Lifestyle and hobbies – For example, smoking increases your risk of becoming ill so you will pay more. There is a waiting period after you submit your claim. Payments will not start until that time. This can be as short as 4 weeks or as long at 104 weeks. The longer your waiting period is, the more you will pay.
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Access:

You may have to pay more if your health or lifestyle are considered dangerous.

Terms:

In case of an incapacitating event, check to see if you have any protection. Also, make sure you know how long it would last. You may be able to benefit from an income protection plan offered by your employer, or you might have payment protection insurance that protects your mortgage.
If you are eligible for state benefits or claim money under another insurance policy, check to see if the policy reduces the amount it pays.

Certain policies will only cover you if you are unable to do any work. However, you must be severely incapacitated to not be able work. Some policies cover you being unable or unable to perform any job for which your skills are required. Premiums are more costly, but you get the best payout if your job is impossible.
Most policies will pay until you reach 65, or the date that you choose to end your coverage.
Compare how different occupations will be treated. Different insurance companies place the same job in different risk groups.

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Does inflation affect the cover?

Critic illness coverage (CIC), which pays out a lump sum tax-free if you are diagnosed as having a life-threatening condition, is often suggested by some advisors to be a more affordable and simple alternative to income protection insurance. CIC does not cover many common situations, such as if you have back problems or are suffering from a stress-related disease. Not all critical illnesses are covered. For example, some stages of cancer may not be covered.