With the nature of insurance underwriting and risk trends, as you get older your insurance premiums will rise. This is as true for income protection as any other type of insurance, but has the added complication of the cover automatically being cancelled when you reach age 65*.
So when you are in your early 60s and nearing retirement, your premiums are rising and your pay-out period is increasingly limited, what do you do?
It can be tempting to cancel the cover and hope for the best, reduce your sum insured, or extend your wait period (the period before the cover starts to pay-out, usually 4, 8, 13 or 26 weeks), however this may not be your best option.
If you are paying higher premiums but have extended your wait period or reduced your sum insured the value you get back in a claim continues to diminish.
If you are unable to work because of an accident you will be covered by ACC, regardless of your Income Protection sum insured or stand down period. This tends to mean that Income Protection can sometimes be redundant when ACC cover is helping, because most Income Protection policies are subject to offsets.
However, if you are unable to work because of an illness, this is where Income Cover helps – but you will only get a pay-out if you are off longer than your wait period – if that is four weeks and you are off work for five weeks you may only get one week paid out. So in a scenario where you are having to extend the wait period to keep premiums down, and are having to consider eight or 13 weeks before receiving benefits, alternative options can be considered.
In these scenarios, consider this: Given that ACC is there for accidents, your Income Cover becomes more about covering illnesses. If you have a long wait period such as 13 weeks, then the Income Cover only becomes effective in scenarios where an illness takes you out of action for more than three months. In most cases (although not all), these illnesses are likely to be conditions that are covered by trauma cover, such as cancer, heart attacks, strokes and so on.
For clients in this position we often recommend they consider trauma cover.
There are a number of reasons for this:
Let’s look at Andrew, a, 63-year-old lawyer. We’ve changed the name, but the figures are from a real client.
Andrew has income protection, with cover of $15,906 per month. He would get half paid out after an eight week wait, and the remaining half after a 13 week wait, but both only have a three month claim benefit. His premium is $223.67 per month.
This cover is mostly offset by any ACC payments available, so would only help by topping up ACC if Andrew can’t work because of an accident, only an illness.
The three month benefit period means he’ll only be paid for three months after his wait period (if he were off for that long) meaning his total potential benefit is just $47,718 – and he would need to be unable to work for a total of six months to receive that.
For a similar premium, $243.74 per month, he is eligible for $100,000 of accelerated trauma cover. This gives him more than twice the pay-out benefit, with no wait period and no requirement for time off work, as an up front, lump sum payment.
In addition to this, his income cover is going to expire at age 65, so the policy he currently has will cancel in two years. Trauma cover can be continued for life – so at this stage of his life and career with all the information available, Andrew may decide it is a much better use of his premiums.
The one downside we would make sure he was aware of is that the trauma cover has a list of specified conditions, whereas income protection is more of a catch all. However the list is extensive, and they tend to be the most common conditions.
You can have stand-alone trauma cover until age 70, however accelerated or linked-to-life cover you can have for life. Because you can have trauma cover for longer, you can get it on a level premium plan, so you know what it will be as a fixed expense which is great for budgeting in retirement.
Different types of insurance are better placed to meet your needs at different stages of life. Trauma cover is not superior to income protection and depending on where you are in your life or career, the best option is often to have both.
All types of insurance have upsides and downsides, and we want to empower our clients to make informed decisions.
It is always best to discuss your options with your adviser, they know the different types of insurance cover available, how to set them up to get the most out of them and what is going to suit you at different stages of your life and career.
*some providers offer “to age 70” options at an additional premium
Here are a few reviews from some of our existing clients around New Zealand