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Life insurance can protect your beneficiaries — whether people or entities — from financial loss. In fact, over half of Americans have some form of life insurance with various riders to help their beneficiaries after their passing, according to Forbes. However, can you use life insurance as financial protection for income in case of an emergency, or do you need something else to do that?
Yes and no. You can use a life insurance policy as a potential salary protection method, but you can also use income protection insurance. If you haven’t heard of income protection insurance, read more to learn how these and life insurance policies can work together to protect your earnings.
Life insurance policies function as agreements between insurance companies and their signees. Upon the signee’s passing, the insurance company pays a lump sum — called a death benefit — to their beneficiaries. The beneficiary of the death benefit can be a person, several people, or an entity, like a business or non-profit group.
You must pay monthly premiums to maintain life insurance, whether you have a term, whole, or universal policy. Term policies tend to last 10 to 30 years, while whole and universal policies last for the signee’s lifetime. The latter two options can accumulate a cash value that can build income through interest and investments.
Most people get life insurance to ensure those they love or care for can maintain their lifestyle or livelihood after passing. However, life insurance can also function as income security based on the type of plan you have.
For example, some people get whole or universal life insurance to accumulate cash value, which they can use while alive. They can fund self-made loans or pay their insurance premiums with their accumulated cash value.
Fewer Americans tend to know about income protection insurance, better known as disability insurance or disability income insurance. Income protection typically comes as a benefit with full or part-time employment, at least 20 hours a week. Still, you can also purchase it from insurance providers on your own, even if you work as a contractor.
Income protection works by calculating your income based on the most recent 12 months of your pay. It can then cover up to 75% of it when you cannot work due to illness or injury. If you pay monthly premiums consistently before the injury or illness, the policy can cover your income for up to five years in periodic payments.
Precise income measurements can make it easier for you to manage and maintain your lifestyle even after you cannot continue working. This type of insurance presents a fantastic opportunity to create an earnings safeguard against unforeseen circumstances.
Although you can use life and disability insurance for income protection, they have many differences.
Life insurance policies typically dole out the lump sum upon the signee’s passing. Meanwhile, income protection insurance works while the signee is still alive. Disability insurance pays 75% of your working earnings monthly instead of providing it all at once.
However, using special conditions, called insurance riders, can also allow people to use their death benefit or cash value while alive.
Most income insurance plans will top their maximum payout at $10,000 a month, though that depends on the company you work with. Life insurance policies, on the other hand, typically start at $100,000, sometimes even $50,000 or $25,000. On the higher end, the policies can pay a lump sum in the millions.
While both policy types tend to have applicant age limits, the limit is higher for life insurance than income protection insurance. You can apply for both at 18 years old, but the maximum age for a life insurance policy is 65. The maximum age for income protection tends to be around 60.
Moreover, many life insurance plans require a medical checkup and risk assessment to establish any pre-existing conditions or substance use. You don’t need to do the same things for most income protection insurance plans.
With whole or universal life insurance, you continue paying the plan premiums until you pass to keep it active. Term policies require you to pay the premium for the set number of years you have the policy. If you fail to pay, the company may cancel your plan in either case.
Insurance protection plans also require you to pay monthly premiums. However, you can temporarily stop paying after you make a disability claim. Once they accept your claim, you don’t need to pay for your protection plan until you either return to work or the payout time runs out.
Both life and income insurance have conditions for keeping an agreement between them and the signee. For example, in life insurance, many companies do not pay if the signee committed an act of self-injury resulting in death. They also tend to withhold payment if you travel to an area with a travel warning and pass away while there.
Income protection insurance may exclude coverage for individuals engaging in dangerous hobbies that could result in sustained injury. They may also prevent financial distribution if you only have had certain types and lengths of injuries. For example, they will likely not accept the claim if it comes from back pain that hasn’t lasted longer than 90 days.
Now that you know more about these two income protection avenues, which one works best for you? A life insurance policy would likely be best for larger sums and usage after your passing. For salary protection to ensure you continue to gain income even with a disability or injury, you may want to choose income protection insurance.
However, who is to say you cannot use both? In fact, disability insurance tends to be comparatively underused when also considering life insurance. Then, those with life insurance sometimes get coverage that is too small compared to their income.
Instead of choosing one or the other, consider a plan that utilizes both in a symbiotic relationship for wage insurance.
You can use life insurance for coverage after your passing and to accumulate more cash value. Some policies also allow you to use a portion of the future benefit amount while alive. Certain riders can even supplemengt your current income upon permanent disability using the disability income rider.
This coverage also works best for a beneficiary-focused future:
Income protection insurance can help you pay for life insurance in case you can no longer work. You can also more openly use the funds from this type of insurance while living than for life insurance. The policy tends to have fewer complications when distributing funds to living signees.
While also beneficiary-focused, the beneficiary includes your living self as well:
If you want income or life insurance to protect your earnings, you need to ensure you don’t get a plan that doesn’t suit your needs. To do so, you should ask yourself several questions:
These and other questions can sometimes be difficult to answer off the top of your head. Moreover, you may experience some trouble while looking for an insurance company that provides what you need. After all, the best practice for finding the insurance that suits you most includes acquiring several policy quotes.
Insurdinary can help you find the policy you need with our search function. We’ve partnered with the best insurance companies in the world to simplify your search for reasonable and affordable income protection. You can then leave a legacy with proper financial security while alive and leave a legacy with additional coverage for your beneficiaries upon passing.
A brighter future may be just a few clicks away. Build up a better, stronger income protection plan by protecting your earnings with Insurdinary.