Accidents, illnesses, or the need to comfort a loved one in distress are all hard enough on their own. When they stop you from working for so long that your income suffers, a hardship can become a catastrophe. You may not be working, but the bills don’t stop piling up.
Income insurance is the answer. This protection ensures that you’ll be able to weather difficult times without destroying your savings, going into debt, or defaulting on crucial payments. But how much income insurance do you need?
How much income cover do you need?
First, understand your goal. For some, the temptation is to think that bigger is always better, and they pay for a policy that offers far more than they actually need. To keep premiums low, others set their policy payout too low. In the first instance, you end up paying premiums for something you don’t need; in the second, you risk destroying your savings during a crisis despite having income insurance.
The ideal goal is income protection that offers what you’re accustomed to: not so much that you get tempted into over-spending habits that will be hard to break later, and not so little that you can’t cover your expenses. Whatever your reason for needing to use your income insurance policy, you should be able to carry on with life basically as normal.
Next, you need to calculate all expenses. To know what you need precisely, be sure to calculate your expenses and understand where all your money goes. Some expenses are weekly, some are monthly, and some are even quarterly or just twice a year.
It can be easy to forget some of these, so sit down and write it all out carefully. Here are some costs to include:
- Weekly and monthly totals for groceries, petrol, and other household living expenses
- Monthly mortgage or loan repayments
- Monthly or quarterly bills, such as for electricity or internet
- School fees and expenses for kids
- Mobile phone bills and fees
- Payments for any other insurance you might carry, like vehicle or life insurance
Don’t forget extra expenses
In addition to these known expenses, consider that you’re most likely to use your income insurance when you’ve been injured or have fallen ill. If that’s the case, you might have out-of-pocket expenses to cover.
These could include medical expenses, the cost of hiring someone to help out around the house, and extra petrol expenses for physical therapy trips or doctor visits. If your regular income wouldn’t be enough to cover these, it makes sense to build yourself a small cushion.
If you have other forms of insurance, they may offer certain benefits in the event of illness or accident. Check with your employer and look at your benefits package to see if there’s already some level of cover in place. If there is, take that into account before buying your income insurance.
If you’re self-employed, you obviously won’t have access to workplace benefits; however, you may have private medical insurance that offers you a stipend in addition to helping with medical bills. There are also state support structures in place, and it pays to check out all of these before figuring how much cover you need.
Choose a cover type
In some places you’ll have the option of arranging for agreed value or indemnity cover. Agreed value offers you a set amount monthly based on what you agree to when you get your policy. An indemnity cover will pay you based on your income at the time you make your claim.
Agreed value is usually the right choice for people whose income fluctuates. Indemnity is the better choice if you have stable income that’s unlikely to drop, and you want to save money on your premiums.
Choosing the right cover is crucial. To learn more and get the cover you need, compare income protection insurance policies at iSelect.