Tips to help you reduce your income protection premiums
Income protection premiums are calculated using a range of variables. What variables you select on your policy, as well as your age and occupation can affect the cost of your cover. Below are the main options that will affect the price you pay.
1. The waiting period
The waiting period on your premium is essentially the amount of time that you will have to wait before you will be paid any income replacement benefit should you go on claim. Generally, most insurers offer a four, eight or thirteen-week wait – the longer you wait, the cheaper your premium. In some cases, such as if you have reliable emergency savings, a longer wait period might suit you best. It all depends on how well you could cope financially before payments kick in.
2. The benefit period
A benefit period is the amount of time you would be paid your income protection benefit for. The benefit period can range anywhere from two or five years, or even to the age of 70 and the longer the benefit period, the higher the premium. According to statistics, most people who are unable to work due to an illness or accident will be able to return to work within two years. However, should you be unlucky enough to suffer a serious illness or accident which leaves you unable to ever return to work, do you have a backup plan?
3. CPI Indexation
Most insurers allow you to select CPI indexation which means that your level of cover will increase every year by the same amount as the New Zealand Consumer Price Index. Selecting this option helps your sum assured to stay in line with inflation. However, this is optional and if you are looking at ways to reduce your income protection premiums this may be a variable you wish to reconsider. However, we recommend speaking with an adviser to ensure your plan is going to be suitable for you in the long term.
4. Mental Health Limitation
Some insurers give you the option to exclude any claims for being unable to work due to mental health or limiting your benefit period for any claims related to mental health, thereby reducing the cost of your cover. Before considering the removal of this option to reduce your premiums, it is important to weigh up your risks and speak with an adviser.
5. Reduce your level of cover
Whilst not ideal, if you are serious about reducing your premiums you can opt to reduce your level of cover. If you do feel that reducing your level of cover is your only option, you may wish to consider increasing other types of cover, such as trauma cover. Trauma cover is ideal in that you would have cash on hand to deal with a serious health condition. However, the number of conditions covered under trauma cover is limited, whereas income protection provides cover for any injury or illness that causes you to be off work for longer than your selected wait period and that, of course, meets the definition of disability.
As everyone’s circumstances are unique and every provider’s policy is unique, it is important to talk to an advisor about your personal situation before making any changes to your income protection benefit. There are some great tips here at the CAB.
- Will Coronavirus Affect my Income Protection or Redundancy Cover?
- Do you really need income protection insurance?
- Managing the wait period and benefit period on your Income Protection Insurance
- What You Should Know About Income Protection Insurance if You Are Self-Employed
- What is the process to get income protection insurance?