Keeping with our theme of income protection this next blog explains the basics around choosing a waiting period.
What is a waiting period?
The brief explanation
A waiting period is the time you need to wait from a claim event occurring until the day of your first payment. For example you are disabled and unable to work for a period of six months and you have a 1 month waiting period the insurer will pay you a monthly income for 5 months after waiting 30 days.
Going into some more detail
The industry norms for waiting periods are 7 day, 1 month, 3 months, 6 month with a few product providers offering other options.
Mentioned in previous blogs income protection is the foundation of all financial planning. It is important to note that like many financial plans you need to be prepared for the worst but hope for the best. There may not be a choice in whether to have income protection but there is choose around how we structure this policy.
When considering a waiting period you need to consider a few things.
- Are you self-employed?
- Are there provisions through your employment that cover you in the event of a disability?
- How long do they cover you for?
- Do you have an emergency fund?
- How many times monthly salary is in your emergency fund?
- If you are unable to work how many months can you provide for?
These are some of the questions your financial advisor should have asked you or will ask you when looking at income protection. The answers will determine the type of income and the waiting period you require.
Below are 2 scenarios that illustrate the value of selecting the correct waiting period
First scenario, you are a business owner and your ability to earn is directly linked to your ability to work like a plumber for example, if he does not finish projects on a daily or weekly business he does not get paid. Very much a no work no pay environment a 7 day waiting period would be ideal. Not only are you more likely to qualify for a claim as you only need to be unable to work for 7 days, but you would also take a significant knock in income should you be unable to work for 7 days. Another advantage with most 7 day waiting periods is that they pay it retrospectively, meaning if a doctor books our plumber off for 8 days he is paid for the 8 days of work he has missed.
Next scenario, a manager in a courier company with an employment contract that will provide an income for 3 months should they become disabled, would only require income from month 4 so a 3 month waiting period would be sufficient. This example could be taken further if our manager had an emergency fund of 3 times their monthly salary they could opt for a 6 month waiting period, reducing the cost of the cover.
The cost of income protection is closely linked to the waiting period. The shorter the period the more comprehensive the cover and like most things in life it is therefore more expensive. A general rule is to start with a 7 day waiting for self-employed individuals and 1 month waiting period for salaried employees and then assess it from there considering needs and emergency funds.
If you would like to consult with an advisor in our network to get a second opinion on your existing cover or to assess your income needs please contact us. Our network of advisors are all qualified and come highly recommended.
All information provided in this article is provided for information purposes only and does not constitute a legal contract between the party delivering this document, the client and any other person or entity unless otherwise specified. Nothing contained herein is intended to be, or should be construed as advice, guidance or a recommendation.