What does your Income Protection policy really pay out?
Many business owners, shareholders and partners hold personal Income Protection policies to ensure their income continues in the event of an accident or illness. Their belief is their policy will pay out without any problems. Unfortunately, this isn't necessarily the case.
It's true. Most Income Protection policies, regardless of whether they're indemnity or agreed value, have an 'offset clause' in them. Insurers put in this clause so that, in the event of a claim, any on-going income from your business or employer by way of sick leave, ACC entitlements, dividends or profit share will first be deducted, or offset, from any Income Protection benefit that you're set to receive.
Why do they do this? The answer is simple. They want to make sure that if you're off work sick you're not in a better position financially than if you were at work.
In fact, the maximum income anyone can expect to receive from all sources at claim time is 75% for indemnity policies and, generally, 55% (net of tax) from agreed value policies. So, if your business continues to generate the same income whilst you're away or, if you're entitled to continue receiving dividends, then you may not be able to receive what you actually insured for. Basically, you could be paying premiums for something that you're never going to receive.
So what can you do? One solution is to opt for a longer waiting period, another is to have enough cover initially (e.g. for the first 6 - 12 months) to cover a 'locum' type person. The advantage of having a locum to cover your absence is that you can easily prove a 'loss' and be paid out on that part of the policy. A longer waiting period means a fuller benefit, paying a more substantial income and commensurate with being in the situation of having to sell your business or resign as a shareholder/partner.
A third option is to do nothing. Why? If you've not been able to attend work for 6 -12 months then you'll probably be in the position of having to sell your business or resign as a shareholder/partner anyway. You'll have no on-going income to offset against and so you can put in a full claim on your Income Protection policy.
In conclusion, it's worth thinking the whole thing through and having another look at the fine print in your policy so you know what's really paying out and when.
Date: September, 2013
Author: Brett Pearce | Registered Financial Adviser FSP 93342 | Pearce Financial Service Ltd
For a full review of your Income Protection policy, please contact Brett Pearce on 09 529 1912 or visit www.bpfs.co.nz for more information.
It's true. Most Income Protection policies, regardless of whether they're indemnity or agreed value, have an 'offset clause' in them. Insurers put in this clause so that, in the event of a claim, any on-going income from your business or employer by way of sick leave, ACC entitlements, dividends or profit share will first be deducted, or offset, from any Income Protection benefit that you're set to receive.
Why do they do this? The answer is simple. They want to make sure that if you're off work sick you're not in a better position financially than if you were at work.
In fact, the maximum income anyone can expect to receive from all sources at claim time is 75% for indemnity policies and, generally, 55% (net of tax) from agreed value policies. So, if your business continues to generate the same income whilst you're away or, if you're entitled to continue receiving dividends, then you may not be able to receive what you actually insured for. Basically, you could be paying premiums for something that you're never going to receive.
So what can you do? One solution is to opt for a longer waiting period, another is to have enough cover initially (e.g. for the first 6 - 12 months) to cover a 'locum' type person. The advantage of having a locum to cover your absence is that you can easily prove a 'loss' and be paid out on that part of the policy. A longer waiting period means a fuller benefit, paying a more substantial income and commensurate with being in the situation of having to sell your business or resign as a shareholder/partner.
A third option is to do nothing. Why? If you've not been able to attend work for 6 -12 months then you'll probably be in the position of having to sell your business or resign as a shareholder/partner anyway. You'll have no on-going income to offset against and so you can put in a full claim on your Income Protection policy.
In conclusion, it's worth thinking the whole thing through and having another look at the fine print in your policy so you know what's really paying out and when.
Date: September, 2013
Author: Brett Pearce | Registered Financial Adviser FSP 93342 | Pearce Financial Service Ltd
For a full review of your Income Protection policy, please contact Brett Pearce on 09 529 1912 or visit www.bpfs.co.nz for more information.