Income Protection Insurance

In the last article I talked briefly about income protection and why it is so important. For most of us our income is our greatest and most valuable asset.

Over our working lives we are likely to earn millions of dollars and our lives would look very different without our earnings.  For example, with 2% inflation, a $60,000pa income is almost $2m over 25 years!

 Most of us should seriously consider protecting our income to preserve our lifestyle should we incur an illness or disability which prevents us from working for a period of time.  Relying solely on ACC is not ideal as it will pay nothing if you become sick and may not pay what you expect in the event of an accident.

So where do you start?  We highly recommend you seek professional advice as this is the most complex area of personal insurance, particularly so if you are self-employed.

If you are self-employed your accountant will work hard to ensure you can claim as many tax deductions as allowed, thus reducing the amount of income on which you pay tax.  Any ACC claim you are eligible for may be based upon this reduced income.  Of course, if an illness prevents you from working you will not receive an ACC benefit and your income could drop to zero for a significant period of time.

There are lots of income protection options and various add-ons and a professional adviser will help you navigate these to ensure you have a tailored solution for your particular needs.  The options include:

  • Agreed Value Income Protection
    • The insurer agrees in advance how much they will pay you in the event of a claim, thus creating certainty around the income you will receive. Benefits are usually non-taxable.
  • Indemnity Income Protection
    • Need to prove income at time of claim. Useful for self-employed where earnings inconsistent or cannot be evidenced for 2 or more years. Benefits are taxable & premiums deductible.
  • Mortgage/Income Protection
    • Like Agreed Value Income Protection, but not offset by ACC, so you receive this portion of your income cover in addition to any ACC payable to you.
  • Loss of Earnings Protection
    • Agreed Value Income Protection, pays 75% of earnings, option to be offset by ACC or not offset, for self-employed. Taxable benefit with deductible premiums.
  • Available Wait Periods
    • You can nominate your preferred wait period before the benefit payment commences (the excess), usually 4, 8 or 13 weeks with longer wait periods available. If you choose a longer wait period, your premium will reduce. It is important to nominate the right wait period for your circumstances.

 Available Add-Ons include (not available from all insurers):

  • Partial disablement (not always included in the main benefit)
  • KiwiSaver contributions paid in addition to your income cover
  • Total Permanent Disablement Booster paying extra if unable to ever return to work, this can add up to millions of extra dollars paid to you.
  • Dependent Caregiver Benefit, paying you whilst looking after a dependent such as spouse or child if they are sick.
  • Higher nominated CPI rate meaning you get bigger increases in benefit if off work longer term.
  • Booster Benefit, pays you a higher income for the first 3 months on claim. This can help you financially following your wait period.
  • Level Premiums so you cost of cover does not increase as you get older making your income cover affordable as you get older.

A complicated but very important insurance benefit, professional advice is recommended. There is usually no cost for you to obtain advice on how to protect your most valuable asset – your income!