Income Protection Insurance

Updated 7 November 2019

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Do you need income protection insurance?

• Each year, tens of thousands of adults in New Zealand find themselves unable to work due to an injury or severe illness.
• ‘Income protection insurance’ is designed to pay you an income if you find yourself unable to go to work for any reason covered by the insurance.
• To answer if you need income protection insurance, ask yourself:

1. If something happened to force you to stop work, could you survive on sick pay and/or savings?
2. How long would you be able to survive without an income?

If your financial situation would deteriorate without an income, considering an income protection insurance policy is a good idea. To make sense of the pros, cons and costs of income protection insurance, our guide covers:

• What is income protection insurance?
• ​Understanding ACC vs income protection insurance
• Do you need income protection insurance?
• How much does income protection insurance cost?
• Do I pay tax on income protection insurance payouts?
• Other types of insurance worth considering
• 10 Must Know Income Protection Insurance Facts
• Best Income Protection Insurance Policies - Company Employees Policies and Self-Employed Policies
• Making a Claim on an Income Protection Insurance Policy
• Buying an Income Insurance Policy - Balancing Price and Coverage​​

​What is income protection insurance?

Income protection insurance is designed to pay money to the policyholder in the event that they cannot work due to illness or injury. Income protection insurance pays a fixed percentage of your income until you are able to return to work or reach retirement age. In most circumstances, the benefit is 75% of the policyholder's most recent income.
 
Quite simply, income protection insurance replaces your lost income until you can start work again, reach the retirement age or die – whichever is sooner.
 
Income protection insurance benefits usually kick in after a ‘waiting period’; this can be a number of weeks and/or after your sick pay ends. Generally, the longer you wait, the lower the monthly premiums, and vice-versa.
 
What does income protection insurance cover?

• While each policy has its own terms, generally injuries and illnesses are covered, and these can be short or long term.
• Income protection insurance is not the same as critical Illness and trauma insurance, which pays out a one-off lump sum (usually between $20,000 to $300,000) if you are diagnosed with a covered illness, or suffer trauma such as a heart attack or stroke etc.

​Understanding ACC vs income protection insurance

ACC is very specific in what it covers, and won't cover illnesses or anything that isn't an accident. If you have an accident and injure yourself, ACC will pay medical costs, physiotherapy treatment and up to 80% of the pre-injury salary is paid until you can return to work. But if the injury is complicated by a pre-existing condition, then all entitlements (care, recovery and compensation) may be denied. 

Income protection insurance is far more extensive and doesn't discriminate on the cause of injury or illness.​

Do you need income protection insurance?

It depends on your personal financial situation. If you developed back problems or an illness like cancer and couldn't work, would you be able to cover your everyday bills and expenses? ACC does not cover lost income due to illness, and four out five long term absences from work are due to illness and not injury.

Cancer, heart attacks, strokes and ongoing back pain are all common issues which often result in long periods off work for recovery. Income protection insurance steps in to provide a regular amount of money until you are well enough to return to work. 

​It doesn’t matter whether or not you have children or other dependants – if a period of time off work means you couldn’t pay a mortgage and other bills, income protection insurance is well worth considering. If you have an employer, it's important to check your current sick leave benefits. If the limit is two weeks per year, then there is little safety net should you require more time off work. New Zealanders who are self-employed who don't have sick leave to fall back on are most at risk of being financially worse off should time off work be needed.

You might not need income protection insurance if:

1. You could get by on your sick pay; some companies offer full pay at up to 12 months for illnesses, which could cover your immediate weekly costs. 
2. You have sufficient savings to support yourself for at least 12 months
3. You are near to retiring and can rely on KiwiSaver and government superannuation entitlements
4. Your partner or family would support you financially while you treat your illness​

How much does income protection insurance cost?

The cost of a policy depends on your age, health, and the benefits of the policy. Generally, the more comprehensive the policy, the higher the cost. 
 
The exact cost of a policy is influenced by:

• Your age
• Your job and annual income
• Your current health, weight and family medical history
• Smoker or non-smoker, or have previously smoked
• The percentage of your income you’d like to cover
• The waiting period before the policy starts to make payments
• The range of illnesses and injuries covered
• The payment period you choose - i.e. two years, five years or up to 70 years of age. 

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Is there any restriction of what income protection policy payments can be used for?

Quite simply, no. If your claim is successful, you will receive a lump sum or regular payment from your insurer. The money is yours to do what you want with it. Most common uses include: 

• Paying bills - mortgage, credit cards, electricity and car expenses add up and are far more noticeable if you don't have an income
• Recovery treatments or rehabilitation – you may want to undertake additional or alternative treatments not covered by either your health insurance or the public health system.
• Childcare and home help
• Repaying debt

Do I pay tax on income protection insurance payouts

The answer is 'it depends', and every policyholder is unique. New Zealand's tax laws make it a little complicated. In the interests of trying to provide some guidance on the tax position of income protection insurance, we have outlined below our current understanding of the tax position. MoneyHub cannot and does not guarantee the correctness of this understanding, nor take any responsibility for any tax outcomes that may arise from any differences between our
understanding as detailed below and the view of the Inland Revenue Department. In such matters, we always suggest individuals seek independent tax advice.

We understand, subject to the above disclaimer, that:

1. If the income protection policy is for an Income Cover Agreed Value, for example, a policy pays a fixed sum of $2,500 per week if you're diagnosed with cancer (with the diagnosis being the trigger of the policy benefit, not the inability to work and loss of income), then this will be paid without being subject to tax. Generally, premiums payable for this Income Cover Agreed Value benefit are not tax deductible and therefore claims proceeds received are not taxable as income. 
2. If you make a tax deduction on a policy, we understand that any benefits paid during a claim become tax assessable. For example, it's very normal for self-employed policyholders to deduct the insurance expense against their taxable income, therefore making any claim payments automatically subject to tax.

Alternatives to income protection insurance that are worth considering

• WINZ support - you will need to attend meetings and be assessed for work capability. If you are approved, the benefit level is between $100 and $200 a week.
• Relying on savings and/or borrowing from friends or family - if savings run out during a period of illness or injury, relationships with friends and family may be strained if you need to borrow given your inability to pay the money back. 
• Critical illness cover - many common conditions such as a back injury, depression or arthritis don't count as 'critical illness' and therefore won't pay out. 
• Life insurance - this pays out if you die or are diagnosed with a terminal illness only, so if you are away from work for six months with a bad back and don't have any other insurance, you would need to rely on your employer's sick pay and/or savings.

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We believe critical illness and life insurance policies should be viewed as complements to income protection and not alternatives given they don't pay out for the same conditions.

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10 Must-Know Income Protection Insurance Facts

Your Payment Period will either be 'Short Term' or 'Long Term'

How long you will be paid by the insurance policy depends on the policy length. There are two types of policy terms:

• Short term: You only get an income paid to you for a set term, such as 2 years or 5 years.
• Long term: You get an income paid to you for as long as the policy allows, usually up to age 65 (retirement age) or 70.

The longer the payment period, the more expensive the policy (all other factors being equal). Picking the right payment period is not easy, and it involves balancing risk vs cost. In a simple example of a 30-year-old office worker, we found that increasing the payment period from 2 years to 5 years meant a 20% higher policy cost. Taking the payment period to 65 years of age doubled the policy cost.
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You must have an existing job to apply for income protection insurance

You can apply for an income protection insurance policy if:

• You work in full-time employment
• You work in part-time employment
• You are self-employed

If you have pre-existing medical conditions, you can still apply - insurers may charge you more, and/or exclude any cover and claims related to your existing condition (and possibly related conditions).
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The risk of developing an illness is higher than you think

According to a survey for the Financial Services Council NZ, 1 in 7 households in New Zealand have experienced a serious illness event over the past 5 years that resulted in an inability to work for 3 months or more and consequent loss of income.

If a serious illness event that resulted in the primary income earner being unable to work occurred, there is a significant effect on households’ ability to continue to pay their household expenses and maintain their lifestyle, once sick leave and annual leave ran out:

• 20% of households would only be able to continue to meet their expenses for 1 week. 
• Another 14% would be able to continue for 2 weeks.
• By 4 weeks after sick leave and annual leave ran out, an overall 55% of households would be unable to pay all their expenses and maintain their lifestyle.

The survey showed that only 20% of households would be able to cope for more than 12 months, indicating that 80% of New Zealand households would be unable to keep on top of their bills. 

Income protection insurance protects against this risk by paying up to 75% of a policyholder's income until they can return to work, so there is far less disruption to their personal finances.

Understand that your ability to earn an income is your biggest asset

If you work for forty years and earn an average of $50,000 per year, you have the potential to earn around two million dollars. This is likely to be more valuable than any property you own. As such, protecting yourself against the inability to earn an income may seem sensible, but the decision to do so will come down to your age, profession, financial commitments and family situation.

For example, a young mother and father of two children are probably more likely to consider income protection insurance than someone in their 50s with a mortgage-free home.  
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Long Term Income Protection vs Short Term Income Protection

If you are ill or injured for a long period, an income protection policy will pay out for a set period of time. The cheaper the policy, the less the payout period will be (all other things being equal). It's important to know the differences, which we outline below. 

Short Term Income Protection (payable for 2 to 5 years)
Short term policies will pay an agreed amount of income for 2 to 5 years; the money received is put towards your general expenses such as mortgage or rent, bills and childcare costs. Once the period of payment ends, no further benefit is paid so if you are still ill or injured, your policy will no longer help. For these reasons, short term policies are cheaper than long term policies because the risk (and cost) to the insurer is much lower.
 
Long Term Income Protection (payable up to 65+ years of age)
Long term Income Protection income pays a regular income if you are unable to work due to illness or disability until you are well enough to return to work, or until you reach an agreed age, usually 65 or 70. 
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Redundancy is usually not covered by an income protection policy

Some insurers may offer it as an optional add-on; it's not standard with most if not all income protection policies. The triggers are illness or injury only, not redundancy or any other restructuring at a workplace. 
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You can have more than one income protection policy, but it probably won't be cost-effective

With two policies, you may be able to get up to 150% of your salary paid as a benefit, but the ongoing cost is likely to be expensive. If you want to eliminate the worry of recovering within the set payout period (i.e. 2 to 5 years), choosing a policy which has benefits paid up to retirement is a safer bet. 75% of an income is significant and should cover essential costs while the public health system, or private health insurance, takes care of your treatment and recovery. 
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Income protection insurance won't pay out until your sick pay is finished

Some employers offer sick pay beyond the statutory requirement (5 days per year) and offer as much as 12 months at full pay. It's important to check with your employer what you're entitled to before choosing any insurance policy. Many policies won’t pay out if you’re still receiving a salary, so it's pointless insuring for to be paid out in 4 weeks if your company sick leave last up to 8 weeks. 

The longer you receive sick pay, the longer you can make your deferment period. This makes the policy cheaper as well.

Self-employed workers pay more for cover, and have higher financially uncertainty in the event of an illness or accident

Unlike employees, anyone who is self-employed doesn't have the luxury of falling back on sick pay or the opportunity to return to work when they recover. Self-employed individuals are the business, and a long-term absence can have devastating effects on the viability of the business. 

Income protection insurance can significantly reduce the amount of financial stress for anyone self-employed working by themselves without co-workers to fall back on. 
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Don't sign up for income protection insurance if you can't afford the monthly cost

Financial stress is a major contributor to a range of illnesses. Buying insurance you can't afford could do you more harm than good. Many banks try and sell income protection insurance to their customers without considering the individual needs. We believe income protection insurance is a luxury and not a must-have.

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Best Income Protection Insurance Policies

How to save thousands on income protection insurance over your lifetime

1. Firstly, never go directly to an insurer first. You’ll pay full price and have nothing to compare with so it probably will not be the best deal.
2. Instead, start with a comparison website like Trade Me's Life Direct. They compare the latest prices from a select number of insurers and aim to give the consumer all of the relevant information to make a decision. Trade Me Insurance confirms that prices shown on their Life Direct website are the same rates offered by all insurance brokers, unless a special agreement has been reached. Life Direct does not give insurance advice.
3. If you have a specialist health condition and/or prefer to talk to someone directly, contacting an insurance broker is a sensible step.

Our Quotes

• We obtained 30 quotes from 5 insurers for two employment types, each requiring $100,000 of cover for both company employees and the self-employed, as outlined below.
• While every policy is different in its specific terms, our Best Buys do indicate the range in price among insurers.
• The results are below, and indicate a large variation in pricing.

Disclaimer: Specific Income Protection Insurance policies and their terms and conditions differ between insurers. We make no representation that the quotes below imply that the policies are the same in form and substance. Please review the policies in detail before making any decision.

Company Employees Policies

The Accountant/Office Worker
35 Year Old Male, Non-Smoker

• $100,000 Annual Salary ($6,250/Month payout - 75% of gross income)
• 4 weeks claim wait period

Insurer	Annual Premium (2 Year Payment Period)	Annual Premium (5 Year Payment Period)	Annual Premium (Benefit Paid to 65 Years of Age)
OnePath	$701.45	$882.72	$1345.94
Fidelity Life	$755.77	$885.49	$1344.37
AIA	$766.39	$982.77	$1509.09
Partners Life	$899.17	$1105.19	$1794.00
Asteron	$857.47	$1076.09	$1747.41

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Self-Employed Policies

The Tradesman - Builder/Carpenter/Plumber
35 Year Old Male, Non-Smoker

• $100,000 Annual Salary ($6,250/Month payout - 75% of gross income)
• 4 weeks claim wait period

Insurer	Annual Premium (2 Year Payment Period)	Annual Premium (5 Year Payment Period)	Annual Premium (Benefit Paid to 65 Years of Age)
OnePath	$1185.88	$1507.16	$2328.21
Fidelity Life	$1406.49	$1660.77	$2560.26
AIA	$1558.38	$2023.19	$3153.70
Partners Life	$1493.14	$1858.67	$3080.85
Asteron	$1490.03	$1868.97	$2968.93

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Making a Claim on an Income Protection Insurance Policy

If you have to stop work due to an accident or illness, claiming on your income protection insurance policy as soon as possible should be a priority. We've outlined the next steps:

1. Contact your insurer - quote your name and policy number, and explain that you will be out of work for a long period due to the reason. 
2. Continue to pay premiums during your claim - if you don't, your policy will be invalidated and your payouts will stop. You may have other more important bills, but keeping your insurance valid is essential.
3. Send documents to support your claim - you'll need to provide a medical report, proof of income, e.g. payslips or a bank account statement
4. Wait for the claim to be assessed - the insurer checks your situation against the policy. In some cases, they may ask for more information.  
5. Accept or challenge the decision - the insurer will either accept your claim and pay you an income, pay a smaller income than what you insured for if your most recent income is lower, or reject your claim. If your claim is accepted, the insurer will keep in contact to check on your recovery progress. 

  
If your claim is rejected, there is other financial support available:

1. Sick pay: The number of days you have in terms of a payout will depend on your employer's policy, how long you have worked for the organisation and how much you have taken already.  
2. WINZ benefits: If you have to leave your job due to your illness, WINZ offers a number of options. 

 
Recovering, and Returning to work

• While you receive treatment and recover, it's important to check in with your insurer and update them on your progress.
• The insurer can assess the benefit you will receive if you want to return to work at a reduced number of days.

Buying an Income Insurance Policy - Balancing Price and Coverage
​There is a lot of money to be made from selling income protection insurance, and for this reason, banks and other companies offer it as an add-on service.

When it comes to getting the best insurance, it's a balance of price and coverage. Don't be tempted by a cheap policy with a lot of exclusions - life is unpredictable, and you want a policy that is clear to cover you for as many different illnesses or accidents as possible. If in doubt about anything, talk to an insurance broker - they work with you to find the best policy to suit your situation. ​​