I was recently in an accountant's office discussing a mutual client's case when he told me his own broker had called in to see him the day before. He advised him that his income protection policy would be unlikely to pay out if he got sick and couldn't work.
Needless to say he was "not happy" to be told the premiums he had been paying for the last 7 years on this policy were not going to give him any benefit at claim time.
This particular client's problem is 'passive income'; essentially income that does not come from his own personal exertion - as a business person it's a great position to be in. However, if you have the wrong type of income protection policy, it's a problem.
In this client's situation any income that he receives as a shareholder of his firm (e.g. dividends or share of profits) would be offset against the payment he was expecting to receive from his income protection policy. The issue for him is the type of policy he has, it is financially underwritten at claim time!! If his passive income exceeds the benefit on his income protection policy then the policy will not pay at claim time.
The problem for this accountant was that the way he is remunerated has changed over the years - but the policy he had didn't keep up with these changes - a very common story especially amongst self-employed people or business owners.
As a business owner, I have a policy that is fully medically & financially underwritten at application time. This means I am fully aware of what I get paid if I can't work before I start paying any premiums. No surprises at claim time.
The policy I have is not financially underwritten at claim time and there are no offsets of other income (e.g. passive income such as dividends) as long as I am not working in any other capacity. I get what I am paying for, with no financial surprises.
Certainty at claim time is what I like and what we try to provide our clients at all times.
If you are self-employed or own a business and aren't sure what would happen to your income or cash flow if you couldn't work for a period of time, get in contact and we can let you know what your options are.
Call us on 09 480 6113 or email us on info@braveday.co.nz
