This article is for those contemplating on purchasing income protection. It will answer important questions to clear doubts and reservations surrounding income protection insurance.
What is income protection?
Income protection insurance is a long-term insurance policy that provides financial security by paying out under the circumstance that you are unable to work due to a severe injury or long-term illness. In Malaysia, income protection can either be a lump-sum payment or a series of consecutive payments (akin to a regular income) until you have recovered and are fit to return to work.
Income protection insurance is different to life insurance (hibah). Life insurance only comes into effect when you pass away. Your beneficiaries will receive the one-off predetermined lump sum to clear off your debts, mortgages, funeral costs and if possible, it could even extend to cover your beneficiaries’ daily expenses.
What’s the risk if I don’t have income protection?
We all know that the basic necessities of life are food, clothing, and shelter. Yet, there is one variable that affects the quality of these necessities – that is your INCOME.
Your income shapes your lifestyle from the food you eat, the brand of clothes you wear and down to the house you live in. In this sense, lifestyle protection is the same as income protection.
As of now, you need to work for your income to sustain you and your family’s lifestyle. However, have you paused to ponder on the risks involved if you suddenly lose your income due to illness or injury?
A majority of working adults have heavy financial commitments consisting of rent/mortgages, children’s education, bills, food and miscellaneous family/dependent’s expenses. Missing an income means that payments cannot be fulfilled leading to loss of current lifestyle along with detrimental, long-lasting financial consequences.
How Much Savings Do I Need in case of Critical Illness?
Now let’s look at critical illness and the duration of recovery. On average, an advanced critical illness may take 3-5 years for an individual to fully recover from, this is in contrast to early/intermediate critical illness which may take 1-2 years. During the period of recovery, here are a few questions you might need to consider:
- If you fall sick today, how are you going to pay for the expenses?
- Who is going to compensate for your loss of salary if you are unable to work due to illness or injury?
- Would you have sufficient savings to cover your expenses after being diagnosed with any type of critical illness? If so, how long will the savings last?
Following up to these questions, it is in your best interest to have at least 5 years of savings, especially in the case of advanced critical illness. Please bear in mind that these savings are meant to cover your monthly commitments but not medical expenses. For the latter, it is highly advisable to have a medical plan/medical card in place to cover your hospital bills.
From here, you can start to answer and decide if getting covered with an income protection plan is worthwhile.
How does the Income Protection plan work?
The product that will protect you against a lifestyle change due to illness is called the Critical Illness (CI) plan. The CI plan allows you to build an income stream if you fall sick.
As of today, a lot of people confuse CI plans with medical insurance. To clarify, medical insurance pays for your doctor’s consultations, hospital bills such as the nursing and care, medicine and more. Essentially, it takes care of all the bills that come up from medical attention. Whereas income protection is a product that protects your income flow during your illness or injury.
The ideal amount of CI coverage that you should buy is 5 times your annual income. For example, if your annual income is RM60,000 per year then your CI cover should be 60,000 x 5 = RM 300,000.
The statistic behind this is that it might take you about 5 years to be able to return to work, therefore you need 5 times of your annual income protected using the CI plan.
Below are a few scenarios where income protection insurance becomes useful:
- An individual recently inflicted by a heart attack has yet to be cleared to return to work due to being deemed as unfit. The income protection provides a cushion to soften the blow from the loss of income as he/she takes time to recuperate and recover at home.
- Individuals that require home restructuring to accommodate their newfound needs after becoming disabled due to illness/injury. With income protection, he/she has an extra source of income to realise the home restructure.
- The sole breadwinner of the family supporting a spouse that was recently diagnosed with an illness. By having income protection, these breadwinners can afford to take breaks from work to care for their spouses whilst being able to cover their daily expenses without their usual earnings.
Ultimately, income protection plays a very important role in your financial plan. Remember that your income maintains your lifestyle, thus the only job of your income protection plan is to protect your lifestyle.
Does income protection cover me if I lose my job due to retrenchment, resignation, pandemic, or market condition?
No, income protection insurance only covers you for loss of income that is brought about by medical reasons – mental or physical, illness or injury. Although retrenchment is something that can also cause unexpected financial hardship, income protection is not the right insurance product to protect yourself against this risk as it won’t pay out for that circumstance.
On a Final Note
Income protection can be extremely worthwhile, particularly if there is a higher probability of you suffering from a long-term illness or injury. It helps you to cope with the financial consequences brought about by work absences due to illness or injury, thus providing peace of mind especially if you are the sole breadwinner in the family. It provides robust, longer-term protection than sick pay, savings or other assets – and allows you to keep your savings intact if you have them.
If you would like to explore further on income protection or a critical illness plan, you may reach out to us via ‘Contact Us’ and we will get back to you within 1-2 working days.
