What is Income protection Insurance
Income protection plan or Income protection Insurance was formerly known as Permanent Health Insurance (PHI). Income protection plan is an insurance policy that protects against temporary or permanent disability. That is, Income protection Insurance pays benefits to a policyholder who is unable to do work due to illness or accident.
Incapacity for an Income protection plan
A person who avails of an Income protection plan will be paid a regular salary if he/she suffers from a long-term illness or injury. This salary is a certain percentage of the preincapacity income. It varies according to different insurance companies. The benefits paid are usually in the range of 60-70% of the person’s normal income. But it might be less for persons with high salary. It must be noted that, any benefits paid by the State may reduce the maximum benefit. Also benefits from any other policies may reduce the maximum.
The definition of incapacity or disability as specified in an Income protection plan is different for different insurance companies. It is advisable for a person who would wish for an Income protection insurance plan to verify the percentage of benefits and exact definitions from the particular insurance company. Generally “incapacity” implies that the policyholder is unable to do the main duties of his/her job due to injury or illness. “Disability” has special definition. It normally applies to professions with high degree of medical fitness.
Incapacity for an Income protection plan will be defined on the following:
Own occupation – the policyholder is unable to perform their own occupation and are not working in another job. Suited occupation – the policyholder is unable to perform an occupation suitable to them according to their education and training etc. Any occupation – the policyholder is unable to perform any occupation at all. Activities of daily living (ADLs) – the policyholder is unable to perform a number of defined activities such as dressing and undressing, washing, climbing stairs etc.
The benefits from Income protection plan are not paid immediately. A policyholder has to wait for minimum 4 weeks and maximum 52 weeks, before he/she starts receiving the payments. This period of waiting is termed as â€œdeferred periodâ€?. Deferred period is the time between a valid claim or when the normal income stops and the commencement of benefit payments. The cost of the insurance is highly influenced by the deferred period. The premiums to be paid will be less if the deferred period is longer.
The premium to be paid on depends upon on various other factors along with the deferred period. Certain financial institutions take into factor the age,gender and medical history of a potential policyholder. Also most insurance companies require a person to disclose whether he/she is a smoker or non-smoker. The benefits from Income protection insurance are payable until the policyholder returns to work or on death , or till the policy term expires. The benefits are paid weekly or monthly. These benefits are tax-free. Also if an employer pays premiums on behalf of their employees, the premium paid are also tax deductible. The payments from an Income protection insurance plan is not equivalent to normal income a person would be earning prior to incapacity or disability. But along with state-provided benefits and tax credits, benefits from Income protection insurance plan may help in keeping personal finances above water.