If you are thinking about income protection insurance, it could be financially worth your while to prepay a year's premiums before June 30 and bring forward a handy tax deduction. But that doesn't mean you should grab any old policy.
Income-protection insurance provides monthly income if you are unable to work due to sickness or injury but there are substantial differences between policies and the coverage they offer.
''There is no benefit in paying your premiums and then realising you can't claim,'' the life insurance ombudsman, Alison Maynard, says.
In 2010-11 the Financial Ombudsman Service handled 433 disputes relating to ''income-stream risk'' products, 78 per cent of them involving income-protection insurance. More than half of the complaints involved the insurer's decision to deny a claim.
Maynard says the three issues that crop up most often are the policyholder's failure to disclose a pre-existing medical condition, an inability to substantiate their declared income, and discovering that their medical condition does not satisfy the terms of their policy.
Not only must you disclose pre-existing medical conditions when you apply for insurance but also any medical investigations you have undergone, irrespective of whether they returned a positive or negative result.
Income protection is sold on either an agreed-value basis, where you set the benefit level when you take out the policy, or an indemnity basis, where the benefit is determined by your gross income in the year prior to disability.
Agreed value is generally preferable for self-employed people because their income can vary significantly from year to year. Indemnity cover is most attractive to employees whose income increases each year.
Maynard says insurers will ask claimants to substantiate their income, so contractors and self-employed people with variable income can have problems if their income prior to their disability was lower than when they took out the policy. You can buy income protection through a financial adviser or direct from the insurer but cover is generally cheaper (although not tax deductible) through your super fund.
The cost of cover depends on the level of benefits, the maximum benefit period, your age, gender, occupation and smoking status, a waiting period before claims can be paid and optional extras.
Traditionally, income protection paid 75 per cent of salary for a two-year benefit period. Many funds now offer longer benefit periods up to age 65 with 85 per cent or more of salary.
Although generally more expensive, the senior adviser with William Buck, Sam Kitchen, says the advantage of having income protection outside super is that premium payments are tax deductible at your marginal rate.
This means you can pre-pay 12 months' premiums before June 30 and bring forward the tax deduction to the financial year the payment is made but the policy must be in force before payments can be accepted. But any benefits paid are assessable at your marginal tax rate, whether you pay for cover inside super or out. ''With [income-protection insurance inside] super, you get a 15 per cent tax deduction on money going in but you are taxed at your marginal rate when it comes out,'' Kitchen says.
CHECK THE EXCLUSIONS
Simple products sold without underwriting and medical checks are cheaper but they generally come with more restrictions and lower benefits.
Some policies will pay out if you are unable to work in your profession while others only pay benefits if you are unable to perform ''any gainful occupation''. Other common exclusions are pregnancy and childbirth, self-inflicted injury, alcohol and drug abuse, AIDS and war-related disabilities.
Unlike life insurance and total and permanent disability, where people often choose to hold basic cover through super and a top-up policy outside super, there is no benefit in holding two income protection policies. Maynard says it is common for income-protection policies to have ''offset clauses''. These stipulate that insurance or workers' compensation payments you receive from someone else can be offset against the amount they are required to pay.
❏ Be full and frank in your disclosure of previous health conditions and medical investigations. You may pay a higher premium as a result, but that is preferable to having a future claim refused. Your duty of disclosure goes right up to the day your insurer offers you cover.
❏ If you are self-employed or run a business, make sure you can substantiate your income. Have a discussion with the person selling the insurance to find out what income can be included.
❏ Compare definitions and exclusions, as well as price. The definition of things such as total disability can vary markedly, with some policies more generous than others.
❏ Avoid paying for two income-protection policies if one will do.