What is Income Protection Insurance in NZ?
One of the best-known insurance covers is Income Protection because in the event of a major illness one of your main concerns is how to continue making an income when you are not able to work. After all, the quality of your life and your family’s life probably depends on that income.
Income Protection Insurance provides you with a regular monthly income until you can get back to work. So, having protection for that income is a ‘no-brainer’.
So, what are the Benefits of Income Protection Insurance?
- Monthly Payment of up to 75% of your previous salary
- You will be covered for accident, injury, and illness (but there are some cautionary notes here which we will cover a bit later)
- It can help to remove stress and financial worry while you're recovering.
- Income Protection Insurance can be taken by anyone – even if you are not employed. (Because we all know that ‘home executives’ probably work harder than anyone!)
- Cover for specified ‘critical illnesses’ may be included: and
- Cover for ‘specific injuries’ (in both these cases you would be paid for a specified period regardless of if you go back to work or not)
In addition to these, there are several other benefits to which you may be entitled or can choose as options, such as:
- Retraining and rehabilitation benefit
- Return to work reward
- Emergency Transport costs
- Extra childcare help
- Special Assistance at home
- Reduction in waiting period (we’ll get to that!)
- Dependent Caregiver
- KiwiSaver contributions
Your answers to that will be a good starting point.
Is Income Protection all I need?
Possibly, But Income Protection works best when it is combined with a couple of other policies – particularly Mortgage (or Rent) Protection and Trauma cover. And here’s why:
Mortgage Protection: It is likely that a decent part of your income gets used for paying your rent or servicing your mortgage. If you only have Income Protection you will need to keep paying these with your reduced income (remember your payment is only up to 75% - before tax - of your previous income).
Trauma: It is possible that your inability to work has been caused by a serious illness. If this is covered by a Trauma policy (there are up to 49 events covered in a good trauma policy) you could get a lump sum payout. That will provide a nest egg enabling you to maintain your quality of life. There are other ways for Trauma policies to pay but that is a whole subject by itself.
So how much does it cost?
That depends on what level of cover you require, the size of your income, how long you want the cover to remain in place after you claim, your age, and what waiting period you require. Waiting periods are simply the amount of time you are prepared to wait for your claim to start paying out (eg 4 weeks, 8 weeks, 52 weeks). The longer the waiting period the cheaper the premium.
What does Income Protection cover?
Income Protection can be a complicated policy so we need to look at a couple of the areas that you should consider before deciding on this cover. Let’s try and keep this as simple as we can:
- Types of cover: currently there are 2 forms of income protection – ‘agreed value’ and ‘indemnity’.
- ‘Indemnity’ will pay you 75% of your pre-claim income. But this will be taxed and you will need to be able to prove your income at the time you make a claim. (Depending on your tax position this is likely to be around 62% after-tax – which leads to…..)
- ‘Agreed Value’ is an amount you and the insurance company have agreed. This will be 62.5% of your income at the time the policy was taken out. Currently, this is tax-free. When you claim even if you are now earning less you will be paid the ‘agreed’ amount. You can also increase the amount covered if you are earning more as long as it is done before any claim is lodged. With Agreed Value when you claim you will not have to prove your income as it has already been ‘agreed’.
- Term of Cover: you will be able to choose how long the policy will keep paying you when you make a claim. This can be anything from 3 months to 5 years or to age 65.
What should I look out for before getting Insurance Protection?
You should decide what level of cover you need and how long you think you will need it. If you are older setting a time period for payment (say 5 years) would probably be adequate. But if you are younger with a mortgage and growing children a period to 65 (or 70) may be more beneficial as it is possible you may not be able to work for a longer period.
But be very careful about what won’t be covered. The last thing you want is not to be able to claim because what has happened to you is not covered. Also, be cautious about ‘offsets’! Now offsets take some explaining but they can have a big effect on the level of payout you get. First up - Income Protection is the only insurance cover that has this condition.
In NZ we have ACC. Everybody is required by law to contribute to this Government scheme. ACC covers you for medical costs (and maybe some additional benefits) in the event that you have an accident but does NOT cover you for illness (the clue is in the name – ACCIDENT Compensation Corporation).
So, if you have an accident you will potentially receive up to 80% of your current income from ACC while you are not able to work. Now let’s assume you have an accident that is covered by your Income Protection and is also covered by ACC. You may think that you will get your payment of (say) 75% from the insurer PLUS the 80% from ACC. Unfortunately, you are about to be hit by the ‘offsets’ clause in your Income Protection.
If ACC is paying you your insurance company will ‘offset’ the money you are receiving from ACC against the amount they would pay you. In fact, if ACC is paying more than your Income Protection would pay it is quite likely that you will receive absolutely nothing from your insurer!
Of course, if the amount from ACC is less than, say, your ‘agreed’ amount the insurer will top that amount up. And should ACC decline your claim or stop paying for any reason (and that would not be unusual) the insurance company would again make up the difference. But if you can’t work because of illness ACC will then pay nothing! In that case, your insurer will pay your Income Protection amount in full.
If you are not employed and get sick and can’t perform your household duties you will be able to make a claim. But there are several conditions associated with this claim. If you fit into this category make sure you understand the requirements.
How do I cover the shortfall in Income Protection payouts?
Earlier we mentioned Mortgage Protection. Simply put, nowadays, the costs of servicing your mortgage or paying rent will probably account for at least 30% (or more!) of your income. By having Mortgage Protection you could potentially reduce the amount of Income Protection you need meaning you will be getting better coverage and it will probably only cost you the same in premiums.
So, taking cover for Mortgage Protection is one way of further protecting your income because with some Insurance companies (not all!) there are no ‘offsets’ in a Mortgage Protection policy. Whatever you are paying monthly for your mortgage (or rent) is what you will receive on your claim. This will be paid to you monthly. (With the right policy these Mortgage Protection payments will not affect your Income Protection benefits. This money is NOT considered for offsets.)
Let’s put this into an example:
- Current income after tax : - $6,000 per month
- Less Your Mortgage : - $2,400 per month
- Income Balance : - $3,600 per month
But then you get sick and can’t work. You are not sure when you will ever get back to work. This is what you will receive:
- Income Protection : - (62.5% of $6,000) $3,750 per month (no tax)
- Mortgage Protection : - Paid to Lender $2,400 per month
- Income Balance : - $3,750 per month
But (and there is always a ‘but, isn’t there?) some insurers tie mortgage and income protection together in one policy. This is where you need to be very careful with the policy wording from your Insurance company. Doing this means they can limit their exposure and the amount you will receive because they can offset Mortgage claims against Income Protection (we are not keen on these policies and suggest that you look for insurers that offer them as separate policies because you will have a better cover!)
What should I do now?
Income Protection is a very good insurance policy and certainly worth considering. But it is not a DIY policy. Our recommendation is that if Income Protection appeals to you then get some independent advice. That advice should be free and unbiased.
We can provide that advice. We will explain just how it can work for you, provide you with details relating to the various policies available and give you a free quote and written explanation of what you will get and can expect.
We will also look at how you can ‘mix and match’ various policies to provide the best coverage to fit your needs and budget. The important part of this advice is that you will NEVER be under any obligation to proceed and it will always be FREE.
We are not in the business of ‘hard sell’. We want you to be completely comfortable with your cover, to understand what you are getting, what it will cost you, and be able to make your own decisions based on having all the facts.