How can you protect your income? Do you need insurance for it? What does income protection insurance cover? And, what happens if you don’t have a plan to protect your earnings?
Imagine, one morning you woke up with a bit of a headache. You’d been having a few headaches of late but this time it got worse, and worse, and worse. You went to ER, and after a terrifying series of tests and scans, it showed a brain tumour. It’s fine, you caught it ‘early’ and they remove it, and you aren’t expected to have it happen again. But the recovery from surgery is long. Longer than your sick leave. And your owed annual leave. Your partner has to take loads of time off work too, to take you to appointments and to look after the kids when you can’t.
The days, become weeks, and months. You’re trying to get well again but you have to get back to work because your whānau has severely limited income without your pay check. So, you go back to work long before you’re ready. You’re exhausted all the time, the kids miss you because you’re either at work, or sleeping, and your spouse is exhausted because they are doing 100% of the parenting and running the household.
About 300 Kiwi households face a similar scenario (or worse) a week.
But, if you had income protection insurance, your income would continue for as long as you needed it to. You could slowly go back to work, part time or full time. You wouldn’t have to worry about how you’ll pay the rent/ mortgage or afford groceries. Your savings account and retirement fund would stay intact.
So, what is income protection insurance, and why don’t you (and most other Kiwis) have it? It should be a no-brainer.
What Is Income Protection Insurance?
Income protection insurance gives you continuity of income if you get a long-term illness, disability, or some other loss of income that isn’t covered by ACC. Cover is available until you can either resume working, the period of time you have selected (e.g. 5 years) or reach retirement age, or die.
There’s a range of different types, depending on your situation. All of these factors affect the cost of the premium.
- Percentage of your income payable. For most policies, the maximum amount you will be able to claim is 75% of your current income.
- Stand-down/ qualifying periods (payouts don’t start until after your sick pay runs out)
- Your age
- Any current illness/ pre-existing conditions
- Payment periods are either short term, up to five years, or long term (life, or until retirement)
Why Isn’t ACC Enough for Income Cover?
ACC is a very specific type of cover. If you have an accident—not illness—and it prevents you from working, ACC covers you for up to 80% of your income, plus medical costs. But that’s it. There’s no illness, trauma, or degenerative disability cover.
Also, if you have an injury that exacerbates a previous condition or you have an illness that complicate things, ACC may refuse to cover you.
Does the NZ Sickness Benefit Cover Illnesses?
Depending on your circumstances, the universal sickness benefit is only around $350 a week. This is only possible if your income is below a certain level. Your partner’s income will likely mean you’re not eligible for the benefit. Too much income to qualify for financial assistance, but not enough to cover mortgage, food, and the bills.
Why Don’t More People Have Income Protection Insurance?
There are three reasons why people don’t have income protection insurance.
One, is that it’s an extra cost. Another form of insurance, another expense to pay each month.
Secondly, people assume they’ll be covered. Sick leave, annual leave, ACC, or the sickness benefit. Their illness isn’t their fault, there should be a safety net provided.
Finally, it’s hard to think about getting so sick that you can’t work. While many Kiwis have life insurance and are covered in case of death, the idea that you could have an illness that renders you unable to work for months on end is difficult to comprehend. Statistically, you’re far more likely to need income protection insurance than life insurance during your working lifetime. One in seven NZ households had a serious illness or health event in the past five years that meant the salary earner couldn’t work for three or more months.
Should You Get Income Protection Insurance?
If something happened to you today, how long could your family survive without your income? Do you have enough savings to cover one month? Six months? A year?
In NZ, 20% of households could only cover their expenses for one week if they lose their primary earner. 55% would only last a month. It’s a scary time that could result in permanent changes to your life, such as selling your home.
If your situation would deteriorate rapidly without your principal earner, consider income protection insurance.
Does Income Protection Insurance Cover Redundancy?
A standard policy won’t cover redundancy. Some insurers may offer it as an add-on.
Is Income Protection the Same as Trauma Insurance?
No. The trauma insurance pays a one-off lump sum if you’re diagnosed with certain illnesses or experience a trauma such as heart attack. But, it won’t cover depression, arthritis, or many other common ailments. Trauma insurance should complement income protection insurance, not replace it.
Should I Get Two Income Protection Policies?
It sounds like a good idea in theory- two policies at 75% of your income means 150% of your income will be paid to you. But insurance companies are on to this. They have clauses within the terms and conditions that means they don’t have to pay out the full cover if you have insurance with another provider. You’ll likely only get to 75% anyway but pay way more in premiums overall. It’s far better to have one policy with maximum benefits and a short stand-down period.
I’m Self Employed: Should I Get Income Protection Insurance?
People who are self employed have a trickier situation. There’s no sick leave, and the business could fail without you. Having income protection insurance as well as business income protection insurance will decrease stress levels and keep your business afloat if something does happen; it’s vital you know you’re covered.
Do you need to protect your income? Speak To Us.
If you think you need to plan for a loss of income, give us a call. Your ability to earn income is your biggest asset: you need to make sure you’re covered if something bad happens. There are lots of options and variations to income protection insurance, so getting professional advice from someone who knows the industry will help ensure you have the best, most cost-effective cover and plan possible.