Why NZ Workers Underinsure Income Protection
Most New Zealand workers protect their car, their home and their belongings.
But what about the income that pays for all of them?
For young professionals especially, the ability to earn an income over the next 20, 30 or even 40 years may be one of their most valuable financial assets. Yet insurance protection gaps can leave workers and their families financially exposed if illness or injury suddenly interrupts that income.
Research commissioned by New Zealand’s Financial Markets Authority (FMA) provides some useful perspective. In a 2025 survey of 1,000 New Zealand consumers, only 10% said they held income protection insurance. By comparison, 59% held motor vehicle insurance and 50% held home and contents insurance.
So why can income protection be overlooked?
There isn’t one single reason. Affordability, understanding, assumptions about existing support and simply failing to revisit insurance as life changes can all contribute to income protection underinsurance.
What Is an Insurance Protection Gap?
An insurance protection gap exists when the financial protection you have may not be enough to meet the financial impact of something going wrong.
For income protection, that gap might appear when:
- You have no income protection insurance at all
- Your insured benefit no longer reflects your current earnings
- Your waiting period is longer than your available savings can comfortably support
- Your benefit period is shorter than the potential financial risk you’re trying to protect
- You have significant household commitments but little backup income
- You assume another form of support will cover more than it actually does
Being underinsured doesn’t necessarily mean someone has made a bad decision.
It can simply mean their circumstances have changed while their personal insurance protection hasn’t changed with them.
- We Tend to Protect Things We Can See
Cars and homes are easy to think about as assets.
Income is different.
Your salary arrives regularly, pays the bills and can feel almost automatic while you’re healthy and working.
But consider a professional earning $80,000 a year.
Even without allowing for future pay rises, decades of future employment could represent a substantial amount of earning potential.
That income may be funding:
- Mortgage or rent payments
- Food and household expenses
- KiwiSaver contributions
- Children’s expenses
- Loan repayments
- Savings and investments
- Insurance premiums
- Holidays and lifestyle costs
- Long-term wealth creation
If employment income suddenly stops, the financial impact can extend well beyond simply missing a few paydays.
That’s why wealth protection isn’t only about protecting the assets you’ve already accumulated. It can also involve considering the income that allows you to continue building them.
- Many New Zealanders Assume ACC Will Cover Them
ACC is an important part of New Zealand’s financial safety net.
If an eligible injury prevents an employee from working, ACC weekly compensation may provide up to 80% of their average weekly earnings, subject to the scheme’s eligibility rules and limits.
But ACC is fundamentally an accident-injury scheme. ACC states that its no-fault scheme covers people in New Zealand when they are injured in an accident.
That creates an important question:
What happens if you’re unable to work because of illness rather than an accident?
Someone who assumes ACC will automatically replace their income whenever they cannot work may discover there is a gap in their financial protection.
Depending on the terms of the policy, income protection insurance can provide a percentage of income when a covered illness or injury prevents someone from working. Sorted identifies income protection as insurance designed to replace a percentage of income for a period when illness or injury prevents someone from working.
Understanding the difference between public support and private insurance is an important part of identifying potential insurance protection gaps.
- Immediate Living Costs Come First
Insurance competes with many other priorities.
Rent or mortgage payments have to be made now.
Groceries need to be bought now.
Power bills, transport, childcare and debt repayments all arrive now.
The FMA’s 2026 research noted feedback from financial advice providers that people facing tighter budgets often focus heavily on day-to-day expenses and debt, leaving limited capacity to think about longer-term financial needs. It also identified financial literacy as a potential barrier to understanding the value of products such as insurance.
This creates an understandable tension for New Zealand workers.
Income protection may feel like another monthly expense when everything is going well.
Its value tends to become much clearer when something goes wrong.
The challenge is that waiting until your health changes before considering insurance may affect what cover is available, its cost or the terms on which an insurer is prepared to provide it.
- Rising Costs Can Lead People to Reduce Cover
Household budgets have limits.
As premiums, mortgage repayments and everyday living costs compete for the same income, some people may look at reducing their insurance.
The Financial Services Council reported in June 2026 that the number of covers across several key life insurance products had continued to fall, while affordability and household budget pressure remained challenges for the sector. The FSC specifically noted that rising premiums can lead people to reduce or cancel cover.
Reducing insurance isn’t automatically inappropriate.
The issue is making the decision without first understanding what financial risk is being transferred back to the household.
Saving $30, $50 or $100 a month may help today’s budget.
But the more important question is:
What financial responsibility would you take back if that cover disappeared?
- Income Changes but Insurance Doesn’t
One of the easiest ways to become underinsured is simply to do nothing.
Imagine someone arranging personal insurance protection when they are 25.
At that stage they may be:
- Renting
- Earning $55,000
- Single
- Carrying little debt
- Living relatively cheaply
Fast-forward seven years.
They may now be:
- Earning $95,000
- Paying a mortgage
- Supporting a partner
- Raising a child
- Carrying significantly higher household expenses
If their insurance hasn’t been reviewed, their protection may still reflect the financial life they had seven years ago.
The FMA recommends thinking about both the type and amount of insurance cover needed to help avoid being either over-insured or under-insured.
Insurance shouldn’t necessarily be treated as something you arrange once and then forget.
- Young Professionals Often Feel the Risk Is Far Away
When you’re young, healthy and building your career, being unable to work for an extended period can feel unlikely.
That makes it easy to prioritise:
- Buying a home
- Travel
- Investments
- KiwiSaver
- Career development
- Lifestyle goals
Those are all important.
But the financial plans behind them often depend on one thing:
Your ability to continue earning.
Income interruption doesn’t only affect today’s household budget.
It can potentially affect tomorrow’s financial position too.
When income stops, a household may need to reduce savings, pause investing, use emergency funds or take on additional debt.
So income protection can be considered not only from an insurance perspective but also as part of broader wealth protection.
- Some Workers Rely Heavily on Savings or Sick Leave
An emergency fund is valuable.
So is paid sick leave.
But it’s worth asking how long those resources could realistically support your household.
Imagine your essential household expenses were $5,000 per month.
Three months away from work could mean needing around $15,000 just to cover those core expenses.
Six months could mean around $30,000.
The actual impact will depend on your circumstances, your partner’s income, employment entitlements and other resources.
This is why savings and insurance don’t necessarily have to be viewed as alternatives.
Savings may help manage shorter financial shocks.
Insurance may be considered when looking at financial risks that could last significantly longer.
How Income Protection Underinsurance Can Affect Families
The impact of losing income rarely stops with the person who becomes unwell.
For many New Zealand families, one person’s earnings contribute to the entire household.
A prolonged interruption could mean:
Mortgage or rent pressure
Housing costs usually continue regardless of whether someone is working.
Reduced savings
Emergency savings may begin covering everyday expenses rather than future goals.
Increased debt
Credit cards, personal loans or mortgage borrowing may become a way of bridging an income shortage.
Pressure on the other partner
One income may suddenly need to support commitments originally designed around two.
Delayed financial goals
Home ownership, investments, holidays, education savings and retirement planning may all need to be postponed.
Emotional pressure
Financial uncertainty can add another layer of stress at a time when a person and their family are already dealing with illness or injury.
These are the practical consequences that make family insurance coverage and income protection worth reviewing before a problem occurs.
How Can You Identify Your Own Insurance Protection Gaps?
You don’t have to start by choosing an insurance product.
Start with your financial position.
Ask yourself:
- How much does my household need each month?
Separate essential costs from discretionary spending.
- How long could we survive without my salary?
Look at savings, sick leave, your partner’s earnings and other accessible resources.
- What support do I already have?
Consider ACC, employer benefits and existing insurance, while understanding the eligibility and limitations of each.
- Has my income changed since I arranged my cover?
A higher income often comes with a higher lifestyle and greater financial commitments.
- Have my responsibilities changed?
A mortgage, marriage, children or additional debt can materially change your protection needs.
- Do I understand my current policy?
Check the benefit amount, waiting period, benefit period, exclusions and policy definitions.
The FMA notes that policy definitions can vary between providers and advises consumers to understand what they are and aren’t covered for.
Income Protection Isn’t About Insuring Every Dollar
Good insurance planning isn’t necessarily about purchasing the largest possible amount of cover.
It’s about identifying the financial risks your household couldn’t comfortably carry itself.
Some households may have substantial savings.
Others may have strong employer benefits.
Some may have two similar incomes and relatively low expenses.
Others may depend almost entirely on one person’s salary.
That’s why insurance protection services should begin with understanding the person rather than simply selecting a policy.
The appropriate structure will depend on factors including income, occupation, existing insurance, savings, debt, family responsibilities and budget.
Protecting Your Income Is Part of Protecting Your Future
Young professionals spend years building careers, growing their salaries and creating financial opportunities.
But the financial plan often assumes the income will continue arriving.
That assumption is exactly where an insurance protection gap can hide.
The purpose of income protection isn’t to predict that something bad will happen.
It’s to ask a much more practical question:
If I couldn’t earn my normal income for an extended period, would my financial plan still work?
If the answer is uncertain, it may be worth reviewing your protection.
When Did You Last Review Your Income Protection?
Your salary may have changed.
Your mortgage may have changed.
Your family may have changed.
Your expenses may have changed.
Your insurance should be reviewed alongside those changes.
A Smart Adviser insurance adviser can help you review your existing cover, identify potential insurance protection gaps and understand the options that may be appropriate for your circumstances.
Because protecting your wealth isn’t only about what you’ve already built.
It’s also about protecting the income that helps you build what comes next.