Income insurance

While none of us want to think about suffering an illness or injury, every week thousands of New Zealanders find themselves in that exact situation.

How would you pay the bills if you couldn’t work due to such an illness or injury? Income insurance protects your most valuable asset – your ability to earn – by guaranteeing you a regular income to cover your essential expenses. ​This offers you and your family peace of mind knowing you will have an ongoing monthly income to meet your personal expenses.

Income protection is available for wage earners, salaried employees, and self-employed individuals.

Won’t ACC cover me?

In the event of an accident, you'll usually be covered by ACC. However, ACC only covers injuries from accidents, whereas income protection cover ensures you are protected in the event of illness and injury.

Helping you get back to work quicker

For most people, even being out of work for a short period can have serious long-term negative consequences. The family home may need to be sold or refinanced, retirement plans delayed, lifestyles downgraded, children’s schools changed, high-interest loans taken out to cover urgent bills, or even bankruptcy declared.

If these events occur, it can take years for things to get back to normal again. By taking out income protection insurance, you’re not only helping ensure you and your family will be okay until you’re earning again, you’re also maximising the chance of everything quickly going back to the way it used to be once you’re back in action.

Guaranteed regular payments

If you’re unable to work due to illness or injury, you’ll receive payments to replace your income. This means you can focus on getting better rather than worrying about how you’re going to cover bills such as the mortgage, groceries, healthcare, school fees, or other commitments.

Income protection is usually paid monthly.

How much cover do you need?

Most commonly, you continue to receive up to 75 per cent of your regular income even though you cannot work. You are only covered up to this percentage of your income because there should be an incentive for you to return to full-time employment when you have fully recovered.

Income insurance policies are highly adjustable to your individual circumstances. However, the amount that you need will depend upon a range of factors including your pre-disability income, your monthly expenses, and of course your budget. One of our advisers can help you calculate how much cover you need.

Flexible payment periods

You can also choose policies that will pay a benefit for different periods including one year, two years, five years, or even until age 65 or 70, provided you’re still unable to work. Naturally, the longer the period, the higher the cost, and the shorter the period, the lesser the cost.

Flexible waiting periods

When you establish a policy, you choose how long you must wait before you receive a claim. The longer the wait period, the lower the premium (regular payment you make for the insurance cover). Of course, the shorter the wait period, the higher the premium. Depending on the insurer, you can choose from 14, 30, 60, 90, 180, 365, or 728 days.

Your income protection premium may be tax-deductible

Generally speaking, premiums for an income insurance policy paid directly by you are likely to be tax-deductible. This means you can look forward to a big discount on your premiums.

Of course, it always pays to check tax matters with an accountant or tax adviser, which we recommend before making any decisions.

Other benefits available with income insurance

Depending on your situation, needs, and budget, a range of additional income insurance options are available with policies offered by various insurers. They include:

• Return to work reward payments
• Retraining benefits for approved training programmes, so you can gain new skills and return to the workforce
• Rehabilitation payments which pay out an extra amount on top of your other income protection benefits, such as an additional 50 percent for every month you participate in a rehabilitation programme
• Various childcare assistance benefits. This is intended to help with additional childcare costs that may be faced such as a live-in nanny or other care
• Reimbursement for costs incurred as a result of emergency transport recommended by a doctor
• Redundancy benefits - which is not covered by most income protection policies
• Reduced or no waiting periods if you’re confined to bed for a set period
• Options to continue KiwiSaver contributions while you’re unable to work so your retirement won’t suffer.

For those on a tight budget, more basic versions of income insurance are also available, including mortgage repayment insurance. This pays a reduced amount, but still offers a degree of assistance.

Can I purchase income insurance online?

Many insurance companies now provide the ability for you to purchase income insurance (and other insurances) online. In most cases, this is not recommended because of:

1. The technical complexity of this type of insurance, including different insurers offering a wide variety of different benefits and features, and the wide range of options available when establishing such insurance. Most individuals will not have any chance of understanding the terms, benefits, and different features explained at length by the insurance provider in pages of fine print containing legal and health jargon. Perhaps most important among this fine print are the exclusions under each policy.
2. The disclosure requirements needed with all insurance. Whether purchasing income insurance on or off line, the first step is completing the policy application form. When filling forms online, you do not have a guide to assist you, including overseeing the completeness and accuracy of your details. Therefore, if you’re purchasing online you need to be extremely careful to ensure all the details entered are accurate and leave nothing out. An insurance company can reject a claim outright if it later comes to light that key information provided is incorrect or is missing something - for example regarding your medical history.
3. The need for the right amount of cover. A robust assessment needs to take place to explore key factors related to this area of insurance, including your line of work, budget, dependants, family situation, family medical history, medical history, assets and liabilities, expectations for cover, commitments, and income.

How can an insurance adviser assist?

Our financial advisers - in this case commonly called insurance brokers - can assist by helping you avoid the pitfalls listed above. Here are some other advantages offered by exploring income insurance with an adviser from Become Wealth:

• You have a guide through the process.
• Understand the fine print associated with all insurance policies.
• Most often, save yourself money. This is because our advisers have great insurance market knowledge, so know which policies should be avoided for being far costlier in the long run (such as those which charge a cheap initial rate then rapidly increase the premiums, or don’t cover what you need them too). Using industry-leading comparative tools, an adviser can connect you with the best policy to most economically meet your needs. Advisers also know plenty of helpful tips which keep the cost of income insurance down, such as tailoring the insurance to meet your needs, so you’re not paying for components of cover you’ll never use.
• While we all hope to never need income insurance, if a claim needs to be made you will have support and assistance throughout. This includes helping you file the claim and provide supporting paperwork - which can be lengthy with this type of insurance, following up with the insurer on your behalf, and ensuring your needs are met. This reduces at least some stress at what will no-doubt be a difficult time. Arguably, this is the biggest advantage of working with an adviser.

You can also gain confidence knowing that Become Wealth aren’t an insurance provider and aren’t owned by one (unlike some financial advice firms!). This is one reason why you know your interests are being put first. Another is that our advisers are all paid a salary instead of commission. They also have no incentive to promote one product over another.

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).

What next?

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? For a complimentary, no obligation chat with a financial adviser about income insurance options for you or your spouse, call 0508 232 663 or leave your details below.