Income insurance protects your most important asset
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.
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.
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.
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.
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.
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.
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.
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.
Depending on your situation, needs, and budget, a range of additional income insurance options are available with policies offered by various insurers. They include:
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.
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:
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 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.
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.
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:
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.
If you’re ready to get on the road to wherever you want to go or a Financial Health Check, now’s good. Tell us how we can help and we’ll be in touch.