Navigating Financial Safety Nets: ACC Versus Income Protection Insurance

Why get income protection insurance when New Zealand has ACC?

The only thing in life you can be certain about is uncertainty. Whether it's an unforeseen injury or a sudden illness, unexpected events can lead to the loss of income and be financially devastating. To mitigate these risks, New Zealanders have three primary options:

1. The government’s ACC (“Accident Compensation Corporation”)
2. Private income protection insurance
3. If you can, be so wealthy you don’t need any form of insurance!

Let’s set aside the third choice and look into the world of financial safety nets, comparing ACC and income protection insurance to help you make an informed choice about safeguarding your income and financial future.

If you were asked point blank, "What's your most important asset?", what would your response be? You may say your house, KiwiSaver Scheme, and investment property, or even your car. But, as important as these might be, they probably mean nothing relative to another key asset - your ability to earn an income. Your income is the financial foundation of your life, and your financial goals and commitments depend on it. It’s worth protecting.

Understanding ACC

ACC is the safety net provided by the New Zealand government. It covers everyone in the country, regardless of their employment status, in the event of an accident. ACC delivers financial support to those injured, helping with medical bills, treatment, home assistance, and income replacement. The critical point to note is that ACC primarily covers injuries due to accidents, not illnesses or conditions related to ageing.

What ACC Covers:

• Physical injuries resulting from accidents.
• Medical expenses, rehabilitation, and treatment.
• In some cases, loss of income due to accident-related injuries.
• Support for daily living and rehabilitation for work.

What ACC Doesn't Cover

• Illnesses or contagious diseases.
• Injuries caused over time (unless it is due to your work).
• Emotional issues, unless linked to an injury.
• Conditions related to aging.
• Hernias caused by disease or ageing.
• Injuries occurring overseas for extended periods.
• Normal side-effects of a treatment you’re undergoing.
• Damage to items like hearing aids or glasses.
• Sometimes there are cases which are not straightforward, and whether you’re covered by ACC or not will depend on the detailed definition of “accident” in the ACC laws.

How much does ACC pay out in the event of a successful claim?

Generally, ACC pay up to 80% of your earnings. However, what you receive will be limited by gross minimum and maximum rates of compensation.

Income Protection Insurance

On the other hand, income protection insurance is designed to provide a replacement income if you're unable to work due to an illness or injury, regardless of whether it’s classed as an accident or not. Unlike ACC, which primarily covers accidents, income protection insurance extends its coverage to various health conditions and can provide financial support for a more extended period.

How Income Protection Insurance Works

Income protection insurance pays out a percentage of your regular income for a specified period, often until you can return to work or reach retirement age. This financial support can cover essential expenses such as rent, mortgage, bills, and daily needs during your period of lost income. Depending on how much cover you want, income protection insurance policies can cost anywhere from a few hundred dollars to over $5,000 per year.

Usually, income protection is available to pay a claim through to age 65 or 70, or a shorter period of two or five years can be selected if it's appropriate for your situation and objectives.

What do you get in return for that cost? Peace of mind

Suppose your monthly income is $8,000, and you bought income protection insurance that covers 75% of it. If you got sick and could not work, you would receive a monthly insurance payment of $6,000 until your ability to work returns or the policy payment term ends. If you were unable to work for a whole year that would mean you would receive $72,000 in your pocket.

Benefits of Income Protection Insurance

• Broader coverage, including illnesses and health conditions.
• Potentially longer-term support until retirement age.
• Customisable policies to fit individual needs.
• It can complement ACC coverage.
• Provides peace of mind for policyholders and their families.
• Provided by private insurers, who are anecdotally more responsive than ACC.

Cost Management for Income Protection Insurance

The peace of mind that comes with any insurance comes at a cost. To manage the cost impacts of income protection insurance, consider making the following adjustments:

1. Reduce the claim payment period: choose between short-term (2-5 years) and long-term (up to retirement age).
2. Extend your wait period: this can reduce premiums. This is a good idea if you have sufficient savings or sick leave to keep you going financially until the wait period is over.
3. Avoid over-insurance: carefully assess your income (or expenses!) needs and avoid insuring more than necessary.
4. Consult with a financial adviser to obtain the best policy to suit your unique circumstances.

Hypothetical Scenarios

To help illustrate how this all works, let's explore two hypothetical scenarios to illustrate the practical application of ACC and income protection insurance:

Scenario 1: Sarah's Injury

Imagine Sarah, a 35-year-old graphic designer, sustains a severe back injury due to a car accident. She's unable to work for an extended period. In this case, ACC would cover her medical expenses, rehabilitation, and provide income replacement. However, if the injury leads to a chronic condition, ACC's coverage may not extend to this, leaving Sarah in a vulnerable financial position.

Scenario 2: Mark's Illness

Consider Mark, a 45-year-old software engineer diagnosed with a serious illness requiring extensive treatment and a lengthy recovery period where he is unable to work. ACC wouldn't apply in Mark's situation as his condition is not due to an accident. Here, income protection insurance could be a lifeline, providing Mark with a percentage of his income until he can return to work or reach retirement age.

Scenario 3: Tom's Perspective

Tom, a 40-year-old self-employed electrician, has always relied on his income to support his family and business and doesn’t have a lot of savings. If he faced a long-term injury or illness, his business's viability could be at risk and he may not be able to pay mortgage repayments for the family home. In this case, income protection insurance would provide Tom with personal income and help safeguard his business operations during his recovery.

In-Depth Comparison: ACC Versus Income Protection Insurance

When it comes to choosing between ACC and income protection insurance, it's important to examine and understand the differences between each, as those differences relate to your personal situation. Both serve as financial safety nets, but their coverage, duration of support, customisation, and roles in financial planning differ significantly. Let's take a closer look:

What Does Each Option Cover?

ACC:

• Primary Focus: ACC primarily covers injuries resulting from accidents. These accidents can range from car crashes and workplace mishaps to injuries from recreational activities, like a game of tennis.
• Limited to Accidents: ACC does not provide coverage for illnesses or medical conditions unrelated to accidents. This means that if you fall ill due to reasons other than an accident, ACC won't come to your financial rescue.

Income Protection Insurance:

• Extensive Coverage: income protection insurance offers a more comprehensive scope of coverage. In addition to accidents, it includes various illnesses and health conditions that may prevent you from working.
• Illness Inclusion: Unlike ACC, income protection insurance considers the broader spectrum of health issues, such as cancer, heart disease, or mental health conditions. This broader coverage ensures that you are protected from a wider range of threats to your income.

How Long You Can Get Support?

ACC

Duration Flexibility: ACC offers support until you recover or reach retirement age. This flexibility can be beneficial, especially if your injury is temporary, allowing you to regain your financial footing without the pressure of immediate income loss.

Income Protection Insurance

Extended Support: Income protection insurance stands out for its ability to provide extended support. If your illness or injury is long-term or permanent, this insurance ensures that you have a consistent income stream until retirement age. This feature is particularly crucial for those facing severe health challenges that may prevent them from ever returning to work.

Customisation

ACC:

• Standardised Benefits: ACC operates as a government-mandated programme with standardised benefits. The benefits you receive are generally the same for everyone.
• CoverPlus Extra (CPX): CPX is an optional cover product for self-employed people or contractors that allows you to select your income coverage in case of an accident, with compensation based on your choice.
• Limited Customisation: While ACC offers a safety net, it may lack the flexibility to tailor benefits to your specific needs or budget.

Income Protection Insurance:

• Tailored Policies: Income protection insurance policies are designed to be highly customisable. You can choose the coverage amount, waiting period, and benefit duration that aligns with your unique circumstances.
• Individualised Protection: Whether you're self-employed, have dependents, or simply want to protect your lifestyle, income protection insurance can be moulded to suit your financial goals and priorities.

Complementing Coverage, Why Not Both?

Once you understand the differences, most individuals opt for both ACC and income protection insurance to enjoy comprehensive coverage. ACC covers accident-related injuries, while income protection insurance safeguards against a broader range of circumstances, including illnesses. This combination provides a robust financial safety net, ensuring you're protected in various scenarios.

Financial Planning

ACC:

• Immediate Safety Net: ACC usually offers an immediate safety net in the event of an accident. It's a vital lifeline that covers medical expenses, rehabilitation, and income replacement during your recovery.
• Limited Long-Term Planning: While ACC addresses the immediate impact of accidents, it may leave gaps in long-term financial planning. It's essential to consider how your financial situation will evolve beyond the recovery period.

Income Protection Insurance:

• Long-Term Financial Strategy: income protection insurance aligns seamlessly with long-term financial planning. It provides a predictable income stream during challenging times, ensuring that your financial goals remain intact.
• Continuity of Lifestyle: income protection insurance helps you maintain your lifestyle, meet mortgage, or rent payments, and cover daily expenses even when you're unable to work for an extended period. This continuity is crucial for financial stability.

Related article: Never cancel health insurance

The Bottomline: Protect Your Most Valuable Asset

Many people in New Zealand tend to overlook income protection insurance, thinking that ACC would step in anyway if they were unable to work.

The bottom line is, ACC can be helpful in many cases, but it also excludes several crucial scenarios. If you're looking for comprehensive income protection, explore income protection to complement ACC. ACC and income protection insurance offer two distinct roles to safeguard your financial future.

Protecting your income is a critical aspect of financial planning, guaranteeing that you and your loved ones can maintain financial stability and continue pursuing your dreams during challenging times. With an appropriate level of cover, you can be comfortable in the knowledge that your family, lifestyle, financial goals, and needs are all covered.

With the protection of your most important asset at stake – your income, what have you got to lose by making a phone call to check your situation? Our friendly insurance advisers are here to answer any questions you may have and talk you through what might work for you. Book a complimentary, no obligation chat with a financial adviser about income protection cover options.