ARE YOU PAYING TOO MUCH FOR INCOME PROTECTION INSURANCE?

Chances are, you already have income protection insurance - many working Australians do. And although many people don’t have enough cover, it worries us just as much that there are huge numbers of people who are wasting money on their insurance.

It’s not just about getting a lower quote – cheap insurance is sometimes cheap for a good reason.

Here are a few of the ways you could be burning money on insurance right now:

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Paying too much tax

Whether your income protection insurance is inside or outside super can make a big difference to the tax dollars you pay:


 

                                            Inside super Outside super
Your premium payments        Tax deduction – 15% Tax deduction – at your marginal rate (up to 47% + Medicare)

(Any benefits you might receive from claim payments are fully taxed at your marginal rate – whether the insurance is held inside or outside super.)

Depending on your personal marginal tax rate and the importance of cashflow, you could potentially save hundreds by holding your income protection insurance outside super – as your premiums are fully tax deductible.

We can go through the numbers for you, and look at whether holding this insurance outside super would make sense for you.

Case study – our client is saving $511 per year *

Profile client SF had some income protection paid for by his employer, however it didn’t cover all of his income. We looked at the numbers to set up an extra income protection plan outside super, just enough to cover the shortfall. With the extra premium of $1,572 tax deductible at 47.5% instead of 15%, SF is saving $511 each year compared with topping up the existing income protection in super.

Accepting inevitable increases

Most people start their insurance when relatively young, and premiums seem pretty affordable, especially if you are paying a ‘stepped’ premium. But while these premiums are cheaper in the beginning, the hidden danger is the ‘stepped’ increases. Your premiums will go up a little each year – and once you hit your late 40s and 50s, the increases get much bigger! You’ll probably still need cover if you’re still working – and if you’ve developed health problems, it may be hard to change policies. You could be locked into steadily escalating costs.

A little-known alternative is ‘level’ premiums. These don’t go up each year automatically with your age (although they can rise with inflation as cover is often indexed). They are more expensive than stepped premiums in the early years, but if you know you’ll need cover for a while, they’ll usually be a lot cheaper in the long-term.

We can run the numbers for you to see which option ends up cheapest.

Case study – this client will save $81,210 between ages 42 and 64*

A new client AK had always paid stepped premiums, and already at the age of 42 was noticing increases getting bigger each year. He intends to keep working and needing the cover until age 64. We ran some quotes and in the first year, the stepped premium would be $1,384, and the level premium $2,626 – more than double. However after 6 years, the total level premiums would be cheaper than the total stepped premiums paid. And by age 64, the total ‘level’ premiums paid would be a huge $81,210 less that he would pay with the stepped option.

Not waiting long enough

Income protection cover is a lot cheaper if you have a long ‘waiting period’ (the amount of time you need to be off work before you can claim). Many of us could support ourselves for at least a while if we got sick and couldn’t work – through employer-provided sick leave, short-term salary continuance cover through a super fund, and/or personal savings.

We can do a careful analysis of the amount of time you could ‘self-insure’ for – which could save you many hundreds of dollars on your income protection premiums.

Case study – our client is saving $1,291 per year*

Our client PS had existing income protection cover with a benefit period of only 12 months – really not long enough in the event of a serious illness or injury. PS had a good annual leave and sick leave balance, and emergency cash reserve, and we calculated he could support himself for around 3 months if he were unable to work. Extending the waiting period from 30 to 90 days on a longer benefit period policy (to age 65) is saving PS over $1,291 per year on his premium.

Paying for agreed value when you don't need it

‘Agreed value’ cover gives you a guaranteed claim amount (should your claim be accepted). Even if your income at time of claim has gone down since you applied for the cover, you will still receive a benefit based on the higher income at the time you applied. It’s a good option for people with very volatile incomes.

However if you have a relatively stable and likely to increase income, you could potentially save a great deal by choosing ‘indemnity value’ cover. With this kind of cover, you will need to prove your income at the time of claim, and your actual benefit payments will be based on this amount. (If your income has gone down, then your claim amount will be lower.)

We can take a look at your personal situation and help you decide whether the lower premiums of indemnity value cover could make sense for you.

Case study – our client is saving $276 per year*

Our client CK was keen to free up some cashflow while still retaining his important insurances. Aged 32, he has a stable income and job and is in good health. Moving to indemnity cover meant his cover would cost $125 per month instead of $148 per month – a saving of almost $300 per year, and over $9,000 over his working life.

Paying for cover that might never pay a claim

There’s been a lot of publicity lately about ‘aggressive’ claims handling practices by insurers. For example, a Four Corners/Fairfax joint investigation in March 2016 made disturbing allegations that a major insurer had systematically and unreasonably delayed and denied claims. But they are not alone, there are many other cases we’ve seen of clients paying for cover that is so narrow that it is very unlikely a claim would ever be paid (such as unreasonably tight medical definitions, exclusions and so on).

With three decades of experience, we’ve learned a thing or two about how insurers operate and how to put our clients in the best position to have a valid claim paid. The claims process can be very stressful, and it helps a lot to have someone in your corner. Plus we’re aware of insurers which have a good reputation in this area and the policies which tend to have reasonable definitions and exclusions.

We can review your current policy and insurer and let you know if you may have a problem if you ever come to claim.

Case study – we helped this client with a claim over $100,000

Our client, SS, has a rare skin condition which flares up periodically causing her to be unable to work. She had initially made a claim through her super fund, and was denied. We worked with her and the insurer through a second claim process and she was successful in having her benefit paid.

* Case studies detailed assumptions

1. Paying too much tax

Male, age 51, income $550,000 p.a., insurance providers : (Executive Super – via employer) (BT Financial – held personally).

2. Accepting inevitable increases

Male, age 43, sum insured $9463 (indexed at 5% p.a.), income $130,800, insurance provider (AIA).

3. Not waiting long enough

Male, age 43, non smoker, income $110,000, (insurance provider (OnePath),  premium reduced from $2092 to $1291.

4. Paying for agreed value when you don’t need it

Male, age 32, stable income, in good health.

5. Paying for cover that might never claim

Our client is female, age 52 and now retired.  She was paying a premium of $15 per month for salary continuance cover through her superfund. We supported our client through the claim, with a good knowledge of her rights and ability to persist with the insurer for a long period, we helped our client get the right result.

Of course, the best options for you will depend on your circumstances and goals. Good advice is vital to ensure you make the right decisions and get the best value cover for your needs.

Get in touch today

Send us a note with a few brief details using the form below, and we’ll contact you to discuss whether we think we can help. Alternatively, call us on (02) 9683 6422 to speak with one of our qualified planners.

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