Wage protection insurance: What is it and does it benefit you?
We all keep our nose to the grindstone in our careers to reach new heights, earn more, and ultimately save more for loved ones. What happens when you’re gone? Here, salary protection insurance, also known as income protection insurance, is a financial tool that helps individuals protect their family members in their absence. This term life insurance generally offers a regular income payment option along with a lump sum payment. When taking out the policy, the policyholder can choose how the sum insured is divided into two components (current income and capital).
If you want to take out this insurance, however, you should consider that it is a term life insurance policy without a maturity payment. In the event of the policyholder’s death, the reference person named by the policyholder receives a guaranteed death benefit (lump sum).
That’s how it works
Consider yourself a potential term life insurance buyer. When purchasing, you need to decide on the monthly income you want for your family member after your death. It can be less than or equal to your current monthly net income.
After that, you need to select the policy and the premium payment period. For example, at the age of 30 (for non-smokers) you can take out a policy for 15 years with a regular premium payment period.
The selected percentage increase in monthly income is determined by the insurer. For example, the insurer may offer a compound annual growth rate of 6 percent on this income, meaning that the monthly amount in each policy year is 106% of the previous year’s monthly income.
Let’s understand it with an example:
Suppose you have decided to earn Rs.50,000 monthly income. In the second year of the policy this monthly income increases to Rs 53,000 and then to Rs 56,180 in the next year and so on.
Suppose the policyholder dies at the beginning of the fifth insurance year. Here the candidate will receive an insured death benefit of Rs 7.6 lakh and an increased monthly income of Rs 63,124. (Protected Death Benefit = 12 x Increased Monthly Earnings in Fifth Insurance Year = 12 x 63,124 = Rs 757,488).
You will continue to receive monthly income each year for the remainder of the policy, subject to conditions set by the insurer.
However, one should be cautious and prudent in choosing such policies as insurers may also sell other types of life insurance policies in the name of payroll insurance.