How to calculate your income protection benefit

Income protection replaces part of your earnings when illness or injury stops you working. It is the cover most households need first and buy last, because it protects the thing that pays for everything else.

Sizing it is a three-variable problem. The monthly benefit is bounded by what the insurer will insure, which is a proportion of your earnings rather than all of them — commonly around 75% of pre-tax income, though both the percentage and how earnings are defined differ between insurers and between employed and self-employed applicants. The reason for the cap is straightforward: an insurer will not put you in a position where you earn more off work than at work.

The other two variables are timing. The waiting period is the gap between stopping work and the first payment. The benefit period is how long payments continue. Those two levers move the premium more than almost anything else, and they are where most of the savings in an income protection policy are found.

1. 1Start with your pre-tax earnings as the insurer would define them. For salary, that is usually your gross salary plus regular employer superannuation and any guaranteed bonus. For self-employed, it is usually net profit before tax plus add-backs the insurer allows.
2. 2Apply the insurer’s cap to get the maximum monthly benefit. At a 75% cap, annual earnings divided by 12, multiplied by 0.75.
3. 3Work out your monthly essential outgoings — mortgage or rent, rates, insurance, power, food, transport, childcare. This is the floor the benefit needs to clear.
4. 4Choose a waiting period you can genuinely bridge. Count your sick leave, your accessible savings and any employer income continuance. If you can survive 13 weeks, a 13-week wait is far cheaper than four.
5. 5Choose a benefit period against the risk you are insuring. To age 65 protects against the event that actually ruins households — a long-term condition. Two years protects against the common ones and costs less.
6. 6Check offsets. Under an indemnity policy, ACC weekly compensation and some other income reduce the benefit paid. Work out what you would actually receive, not what the schedule says.

A worked example

A salaried employee on $90,000 with a mortgage, some sick leave and three months of savings. Round illustrative numbers, used to show the method.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Agreed value versus indemnity. Indemnity re-tests your income at claim, which matters if your earnings drop.
• How the wording defines income for a self-employed person, particularly around retained profits and shareholder salary.
• What is offset against the benefit — ACC, sick leave, other insurance, and in some wordings passive income.
• Whether the definition of disability is your own occupation, or any occupation you are suited to.
• Whether there is a partial or proportionate benefit if you return to work part time.
• Whether the waiting period runs from the date you stop work or from the date of diagnosis.

Every New Zealand insurer writes income protection insurance to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• Insurer definitions of income differ enough that the same person qualifies for materially different benefits.
• An adviser can structure ACC-aware cover so you are not paying twice for the same accident risk.
• They can pair a shorter benefit period on one policy with a longer one on another where budget is tight.
• For the self-employed, they know which insurers accept which income evidence, which decides how much you can insure.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.