What if you already have income cover?
As is the case with other insurance policy types, the level of income cover a person needs can rapidly change depending on a wide variety of life events, especially changes to your income, career, line of work, and expenses. This combines with the constantly improving nature of the insurance market to mean that yearly reviews of your levels of existing insurance are a necessity. Please contact us if you would like to review your current policy or policies, especially when noting the comments below.
Duplicate income insurance policies
Our advisers see a wide variety of people right across the country. The most common income insurance issue they encounter is people with duplicate income insurance policies. Many people over-insure in this way by taking out two income insurance policies to try and cover 100 percent or more of their earnings.
The issue is that insurers will only allow you to receive a certain proportion of your pre-incapacity earnings while you are out of work. As mentioned earlier, insurers do not want you to be just as well off out of work as when you were in work, as this way there is always an incentive to get back into the workforce. Technically, you can take out multiple income insurance policies, so long as the total level of cover doesn’t cross the maximum level allowed by each insurer - which in New Zealand is nearly always 75 percent. For example:
If you have two income protection plans covering 75 percent of income and both insurers only allow you to cover a maximum of 75 percent of income, then only one plan would pay out, usually the first plan you established. The premiums you paid for the second plan have effectively been wasted.
On the other hand, if you had only insured 25 percent of your salary with one insurer and 50 percent with another (resulting in total cover of 75 percent of income) then there are no issues.
Note: This is not the same as people choosing multiple income protection policies to help them manage short and long-term financial loss of earnings. In this instance, a common strategy to reduce costs is to:
- Establish cover in the first two years of disability with one policy that pays a reduced benefit (for example, 55 percent of income), then
- Combine that with a policy that has a two-year waiting period that pays an increased rate (for example, 75 percent of the insured persons income up to age 65).