When you decide on an income protection or mortgage protection cover you will be asked what waiting period you want, and most people don’t really have any idea. Of course, if you make a claim you will always want the payments to start as soon as possible so a 2-week or 4-week waiting period might seem long enough to wait; however the wait period is like an excess and the shorter this is the higher the cost.
Who Needs Income Cover?
Horizon Research has published data that shows that only about 15 per cent (1 in 7) of New Zealand households have income protection insurance and that there are nearly one million households with incomes above $20,000 that would be vulnerable if they faced a long term illness that stopped a major earner in the household working.
Some people think that ACC will cover them financially, and in cases where people are unable to work due to an injury ACC does often help. If you cannot work due to a illness they you then need to rely on the sickness benefit entitlement which is around $343 a week, but your entitlement to this benefit is affected by your partner’s earnings and is only available if your other household income is below a certain figure. This means that many families find themselves too well off as a household to qualify for a sickness benefit, but too poor to pay the mortgage and food bills.
The reality is most people would be grateful to have income protection cover if they ever found themselves unable to work due to either injury or accident.
The question then becomes cost of the cover and which policy to choose from. You want to ensure at claim time that you have the best policy and you want to know that the money is available when you need it.
One of the biggest influences to the cost of cover is the wait period and that is why we have dedicated this article to the subject of waiting periods.
If you become disabled, you’ll have to wait a certain number of days before you are entitled to collect disability benefits.
You are able to choose the length of your waiting period when you purchase your income protection or mortgage protection insurance policy. You’ll generally be offered a choice of waiting periods ranging from 4-weeks to 104-weeks (30 to 720 days) and you should base your decision on two factors: (1) how long you could live off your savings without receiving disability benefits, and (2) how the waiting period affects the premium you pay.
Many people with these type of insurance do not remember what their waiting period, may not have ever recalled being offered a choice and have probably never thought to review it.
The 4-Week Wait Is Common
Most of the insurance quoting software defaults to a 4-week waiting period and this is also the waiting period used by most bank staff and insurance brokers. There is no specific obvious reason for this except some people might suggest that it is to ensure that people do not go to longer waiting periods.
You see, insurance companies like receiving more premiums and so do the bank staff and insurance brokers as the more the premiums are, the more they earn. Insurance companies will earn more with higher premiums and the commission that they pay to brokers is based on the premium collected.
Or it may be the default because the 4-week wait period is the most common.
When you decide to get an income protection or mortgage protection policy you should consider what wait period is appropriate for you.
Base Your Decision On Your Needs
Auckland mortgage broker Stuart Wills always says insurance is expensive and therefore you should select the cover you need to ensure you have financial protection rather than a windfall gain because you decided to treat insurance like a lottery – that meaning you will be far better off after a claim. The concept of having insurance is not “a money making scam” but rather a form of financial protection.
The hope is that you will never need to make a claim, but the reality is that about 50% of males are likely to become disabled due to an accident or illness which will prevent them from working for at least a month before they turn 65-years old. This increases to 70% with females, but more importantly of those females about a third will still be on claim after 12-months.
This would suggest that most people need to have cover, but how soon do you need the payments to start?
How long you could live off your savings without receiving disability benefits?
The easiest way to calculate this is to look at your monthly take home income versus your savings. If you have a take home income of $2,500 and savings of $5,000 then you could determine that you could wait 2-months before you have exhausted your savings and need the insurance to start paying out.
If you have a mortgage you could always apply for a mortgage holiday (which most banks offer) and this should allow you a period of 3-months without having to make the mortgage repayments. For this reason many mortgage brokers would suggest a 3-month waiting period.
Reduce Insurance Costs
As mentioned, one of the easiest ways to reduce the cost of income cover or mortgage protection cover is to have a longer waiting period. Of course, from the insurance companies view having a longer wait period means you are less likely to make claims for those shorter periods when you may be off work and therefore they can factor this in when pricing the policy.
When we look at premium costs;
The premiums for $2,500 per month ($30,000pa) for a 45-year old male in good health and a non-smoker working in sales would be just under $115 monthly with a 4-week waiting period (with Sovereign as below), but change the wait period to 13-weeks (3-months) and the monthly premium cost reduces to just under $55 a month which is about half the cost.
People might think that income protection cover is too expensive, but sometimes you need to consider how the policy is structured.
Should You Have Income Cover?
In most cases we would need financial help of some kind if we were unable to work for any period of time. The time we can survive will differ with each and every situation and even as you go through life your own situation will change.
As illustrated here, one of the easiest ways to reduce the cost is to have a longer waiting period.
If it really comes down to it most people could survive for 3-months without their income, especially if their spouse or partner was able to continue to earn money and even if it meant getting a mortgage holiday and paying for some things on the credit card or with help from family.
Beyond 3-months when the mortgage needs to be paid and savings have diminished things might get more difficult, but you do need to consider your own situation.
Remember, check what waiting period you have or have been quoted.