Income Protection Insurance 101: An Introductory Guide
Introduction
In the ever-changing landscape of life, Income Protection insurance serves as a financial safety net, providing you with a steady income stream if you’re unable to work due to illness or injury.
Let’s explore the benefits of Income Protection insurance and why it could be a crucial part of your financial planning.
What is Income Protection Insurance?
Income Protection insurance is designed to replace a portion of your income if you’re unable to work due to illness or injury.
In most circumstances, the benefit is 75% of the policyholder’s most recent income1.
The 75% payment is called ‘indemnity’ cover and any payments you receive will be taxed. Payment amounts will be calculated based on your recent earnings. This works for those on a regular income but for if you earn varying amounts (such as tradies or the self-employed) this could be complicated.
But you could also choose the ‘agreed’ method. This pays less, usually 62.5%, but is an ‘agreed’ amount chosen when you take out your policy and does not rely on your recent income. This is a tax free amount.
There are similarities and differences in these covers and it is important to work out which option works best for you.
Why You Need Income Protection Insurance
Financial Security: If an illness or injury prevents you from working, income protection insurance provides regular monthly payments to cover your ongoing financial commitments like household bills and mortgage or rent payments2.
It is likely that your Income Protection cover may not be enough to cover all your costs (you are probably already spending as much – or even more – of what you earn now!). Income Protection is an important part of your insurance plan but it is worth considering other types of cover, especially ‘lump sum’ cover (like Trauma) and rent or mortgage cover. A combination of these various policies can provide much greater security and spread the level of money you will receive when you claim.
Flexibility: The payout from Income Protection insurance can be used however you see fit. Whether it’s to cover medical costs, maintain your lifestyle, or even fund a career change, the choice is yours2.
And should you need to consider a career change, most Income Protection policies have a vocational training component, a ‘back to work’ lump sum payment and rehabilitation assistance.
Peace of Mind: Knowing you have a financial backup plan can reduce stress and allow you to focus on recovery2. Income Protection can be a life-saver in the event that you can’t work for an extended period.
Choosing the Right Income Protection Insurance
There are several providers of Income Protection insurance in New Zealand3. It’s essential to compare policies and choose the one that best suits your needs.
Factors to consider include the level of income you wish to cover, the type of policy, the waiting period before payments start, and the duration of the benefit period1.
Conclusion
Income Protection insurance is an essential part of your financial security. When life throws a curve ball your way it ensures that you can maintain your lifestyle and meet your financial commitments .
While Income Protection is a worthwhile cover to consider, it can appear complicated at first. This is a policy that we recommend getting some expert advice on before committing to it.
So, if you haven’t considered income protection insurance yet, now might be the time to start.
At Bold we know the ‘ins and outs’ of Income Protection cover. We are happy to help you with advice and recommendations that are always free, at no charge and with no pressure – ever!
References
: “Income Protection Insurance | Compare, Quote and Save – MoneyHub NZ”, MoneyHub NZ1. : “Compare Income Protection”, Compare Income Protection NZ3. : “Income Protection Insurance – Protect Your Future | AIA NZ”, AIA NZ2.
