- What is income protection insurance?
Income protection insurance is a type of insurance that provides individuals with continuity of income should they suffer a long-term illness, disability or other loss of income
- Is there more than one kind of income protection policy?
Yes. One type of income protection insurance pays a percentage of your income after a qualifying period. You can also obtain income protection insurance for situations when an individual suffers trauma, disability or total permanent disability based on regular payments of a previously agreed amount. The right policy for you depends on your age and circumstances.
- I thought if I was off work I was covered by ACC?
ACC automatically covers 80 percent of your income in the event of an accident that prevents you from working. It does not provide alternative income for you or your family in the event of a sickness, trauma or certain kinds of disability such as a stroke.
NB If you are self-employed and are not on PAYE you must prove loss of income before you can claim ACC income protection. Difficult if you have staff, your income continues for a period of time or you have not submitted last year’s accounts to the IRD.
- What exactly is the problem with not having income protection insurance?
The Government’s universal sickness benefit entitlement is around $343 a week. However entitlement to this benefit is affected by your partner’s earnings and is only available if your other household income is below a certain figure. This means that many families find themselves too well off as a household to qualify for a sickness benefit, but too poor to pay the mortgage and food bills.
- Are the risks of losing income from sickness well known?
No, the general population is not aware of this risk, although research has clearly identified that the risk exists for the great majority of New Zealanders. Horizon Research has provided data that shows that only about 15 per cent (1 in 7) of New Zealand households have income protection insurance and that there are nearly one million households with incomes above $20,000 that would be vulnerable if they faced a long term illness that stopped a major earner in the household working.
Nearly 300 families in New Zealand face this situation every week with only 45 of the 300 having some form of income protection.
Nearly one million households (972,000) on incomes above benefit levels have this financial vulnerability.
- Why is income protection insurance so “expensive”?
The major driver of the cost of income protection is the likelihood of a claim and its expected duration. Statistics show New Zealanders are 2.6 times more likely to lose income from being off work for six months or more as a result of sickness than of losing the same amount of work time as a result of an accident. The period you have off work after sickness is typically much longer than for an accident.
Check the future value of your income on our calculator. This is what you are insuring not the monthly amount. Compare this to the value of your house.
Questions to ask your self
– What is my biggest asset?
– How long can I/my family go without income?
- How can middle income families afford income protection insurance?
The best way for middle income families to afford income protection insurance is for them to regularly review their total insurance cover package as their circumstances change. For example, as you get older, pay off your mortgage and your children are no longer dependent, your life insurance needs can reduce, freeing up more resources for income protection insurance.
Look at level premium income cover to ensure the premiums remain affordable as you get older. Stepped premiums (go up with age each year) rise steeply once you get into your 50’s as the risk increases so look to avoid this by taking out level premium cover so you can afford the cover when you may most need it.
Acknowledgement: Much of this information is from the Financial Services Council