Here’s a guest post from James Paul who is a personal finance blogger over at Basic Finance Care. He covers everything about personal finance management and frugal living.
Life is too uncertain and that is what has led to the introduction of insurance. There are different types of insurances available for almost everything under the sun, including life insurance, health insurance, flood insurance & more. Of the varieties of insurance types available, life and health insurance are among the most popular.
Have you ever reflected on what is your most essential asset? The same one that makes it possible for you to pay for all these other insurance policies? Well, it’s your income! And, most people almost forget to insure that.
When should you insure your income?
When you are fit and healthy to earn, you feel your income will stay consistent. However, there is really no certainty about this. A misfortune can change anyone’s life situation especially in terms of a regular income.
In an era where economic recession is always lurking, if you don’t keep your job prospects updated, you may end up on the unemployment line if things go sideways. As such, one of the really important foundations of financial planning is to get your income insured.
The Need For Disability Insurance
There are different types of income insurances – the most common one is disability insurance. Disability insurance helps to protect your income in case of any serious illness, injury, mental health issues, and other such unfortunate circumstances that may prevent you from being able to work and earn income.
Related: Is Mortgage Life Insurance Worth It?
Myth of life insurance protection
A common line of thinking that people fall into in relation to life insurance is that it will sufficiently protect their families in the case of an untimely death. While this may be largely true, life insurance may not be of any use in the case of a debilitating illness or permanent injury.
Benefits of disability income protection insurance and options
- It protects you and your family by replacing a portion of your income in case you are unable to work due to accident, serious illness or disability.
- Capital sum benefit:Many disability policies facilitate a lump-sum benefit amount in some cases, such as when the policyholder loses a limb or an eye. This is an extra amount apart from the normal monthly-insured amount.
- Renewability clause:There are various levels of guarantees of renewability for the disability policy coverage similar to life insurance. In general, guaranteed renewable policies are more expensive.
- Premium Waiver:The insured may not be required to continue to pay premiums during their disability when premiums are waived.
- Waiting Period: It is important to note the waiting period for all types of insurance policies. This waiting period is the time for which there will be no pay-out to the holder.
Levels of coverage for disability insurance policies
Each disability policy has different levels of coverage.
Total disability coverage will pay the cost when you are unable to work, while residual disability will cover partly if you are capable of some level of gainful employment.
Own occupation disability coverage is more expensive and will replace the income of the insured equivalent to their original income during the disability period. Any occupation coverage only pays when the insured is unable to get a gainful employment with training, education or experience.
True own occupation coverage is the best and the most expensive disability insurance. This coverage will bridge the gap between the actual income and the income earned by the insured in a low paying job due to partial disability.
Tax Benefits of Disability insurance income
Disability insurance policies are always tax-free as long as there are no deductions on the cost of premiums paid. If premiums are deductible, then any income received is taxed as ordinary income. Insurance agents and financial consultants generally advise clients to refrain from making premium deductions so they can reap the full benefits of disability insurance policies, should the need arise.
Life Insurance Add-on riders
Many life insurance policies cover a part of disability insurance as an add-on rider. This option will pay out a monthly benefit when the insured becomes chronically ill. There may be additional requirements in order to qualify for this benefit.
Disability insurance can provide a cushion of protection in times of crises. I hope this article was able to throw some light on why it is important to insure your income.