Protect Your Income: Protect Your Lifestyle (Part 3)

Part 3

Types of Cover available include:

• Agreed Value Income Protection
• Indemnity Value Income Protection
• Mortgage Repayment Insurance
• Loss of Earnings Cover

The main difference between "Agreed Value" and "Indemnity Value" is deciding when the monthly benefit amount is determined - at claim time or when you take out the policy.

Agreed Value Income Protection is at application time, so 55% of your base income or average of last year's net income is set at the time of application and proven to the insurer by a pay slip, the last 12 months' books, or a copy of Employment Contract.

This level of cover is then set for the policy and no further proof of income should be needed at claim time.

As the current IRD New Zealand tax laws state, this Agreed Value Income Protection should also be a tax-free benefit. The premium is not tax-deductible. This type of cover is ideal for people wanting the security of a fixed benefit amount at claim time or, the self-employed who have had a good last 3 years and want to take advantage of fixing their Income Protection benefit now for the future. This would forfeit any benefits of the premium being a tax-deductible business expense.

Indemnity Value Income Protection is very similar and has the same benefits and structure of an Agreed Value Income Protectionpolicy but the level of cover is determined at claim time. When the cover is established, the monthly benefit amount is based on 75% of either your last year's net income, or the best 12 months in the last 3 years. This depends on the insurer you choose and your Insurance Advisor should be able to help you work through the best option for you.

The monthly benefit is payable as a gross figure which would need tax to be paid off it manually at claim time by the insured and the premium is tax-deductible.

The biggest difference is that proof of income is needed at claim time so this is why it is vital to make sure you are always insured for an amount that is accurate and can be proven at claim time.

A good Insurance Adviser will ask for your books once a year if self-employed to make sure you are always insured for the right amount.

Indemnity Value Income Protection is ideal for the self-employed, as the premium is tax-deductible as long as they are comfortable that a certain level of income is always able to be proven. Also ideal for someone employed who is comfortable again that they will always be in a position to proveincome and may have a Family Trust or Look Through Company (LTC) which would benefit from a tax-deductible expense.

Mortgage Repayment Insurance is ideal for the self-employed and always my first choice for cover if self-employed and have a mortgage in place, as Mortgage Repayment Insurance requires no proof of income and so can be very helpful if the self-employed level of income is known to fluctuate, or in the case of some professions, such as Real Estate Agents over the recession, cease to exist all together for sometime.

Another real bonus of MRI is that it's not offset by any other payments. A downside of agreed value and indemnity value income protection cover is if you are off work due to an accidental injury and receive an ACC Benefit, the ACC payment received will be deducted from the Income Protection Benefit.

Example...

This means as an example, if you earn $100k pa and Agreed Value Income Protection, you would be insured for a net monthly benefit of $4,853. If you are off work due to an acceptable accidental injury and receive 80% of your income from ACC, this would be $6,666 per month and so you would only receive $1,813 per month from your Income Protection Cover, even though you have been paying a monthly premium based on the full $4,853 per month.

With Mortgage Repayment Insurance you would receive the full mortgage repayment amount (if you chose to be insured for this) plus the full $6,666 per month from ACC.

This benefit of having no other income offsets and is also relevant for trail commissions possibly still receivable if not able to work, after passive income etc.

A good quality Mortgage Repayment Insurance is also usually more cost-effective than Income Protection and would usually amount to Income Protection with no further application needed, once the mortgage is paid off in full.

Proof of the mortgage is needed either at the time of application or at claim time depending on the insurer, but again, the emphasis should be on your Insurance Adviser to make sure the right monthly amount is always insured.

There is one Insurance Provider currently that offers a "Loss of Earnings" Income Protection Cover that is similar to Mortgage Repayment Cover, where the insured monthly benefit is calculated on the "actual lost earnings" from being sick or injured and unable to work, so takes into account other payments such as ACC. This helps to ensure you are covered for an amount that is accurate and actually what would be "lost" if unable to work and allows for other forms of passive income to be taken into account while not disadvantaging you the insured. This may all sound complex, but this is where the skills of your Insurance Adviser should help with working through what the best type of income protection is for you taking into account your own personal circumstances, your employment history and your plans for future employment.

Peace of mind that your income is protected then provides assurance that your financial well being and that of your family and your lifestyle will always be protected no matter what.

Source: http://ezinearticles.com/6258323

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