Income protection: cover for when you cannot work

Income protection insures the thing everything else depends on. The mortgage, the KiwiSaver contributions, the school fees, the insurance premiums themselves — all of it is paid out of your income. Life cover protects your family if you die. Income protection protects all of you if you simply stop earning, which is a far more likely event.

The mechanics are straightforward. You insure a monthly benefit, usually capped at around 75% of your pre-disability earnings. If illness or injury stops you working, the benefit begins after the waiting period and continues while you remain disabled, up to the end of the benefit period. If you recover and go back to work, it stops.

Why it is the first product most people should buy

• It responds to any illness or injury that stops you working, rather than a list of named conditions.
• Temporary disability is far more common than death or permanent disability before retirement.
• It keeps the mortgage current, which is what prevents the forced sale of a house.
• It keeps your other insurance premiums payable, so the rest of the plan survives.
• For the self-employed there is no employer sick leave behind it — the income simply stops.

The single most consequential choice on an income protection policy is how the benefit is valued, because it decides what you have to prove when you claim.

Agreed value is the certainty product. You prove your income once, at application, and the insurer agrees the benefit then. If your income falls afterwards — a bad year in business, a move to part-time work, a change of role — the benefit does not fall with it. That certainty has become increasingly restricted in the New Zealand market, and agreed value cover is not offered as widely or as freely as it once was.

Indemnity cover is cheaper because the risk of over-insurance sits with you. At claim time the insurer looks at what you were actually earning before you became disabled and pays a percentage of that, capped at the insured benefit. If your income has fallen since you applied, so does your benefit — while your premium was based on the higher figure all along.

Loss of earnings sits between the two. It also tests income at claim, but against a defined reference period and with more flexibility about how earnings are calculated, which suits people whose income fluctuates. For self-employed New Zealanders it is often the most practical structure available.

Three settings determine both the cost of the policy and how useful it is. Getting them right matters more than shopping for a lower premium.

Waiting period

The time between becoming unable to work and the benefit starting — commonly 4, 8, 13 or 26 weeks, and sometimes as long as two years for people with substantial sick leave or savings. Lengthening the waiting period is the most effective way to reduce the premium. Match it to how long you could genuinely fund yourself: sick leave, annual leave, savings, and a partner’s income.

Benefit period

How long the benefit can keep paying — typically 2 years, 5 years, or to age 65. A two-year benefit period covers most claims by number, but the claims it does not cover are the ones that ruin households. Where budget forces a choice, a longer waiting period with a to-65 benefit period is usually a better structure than a short waiting period with a two-year benefit.

How much

1. 1Work out your actual pre-tax income, including regular overtime, commissions and shareholder salary.
2. 2Apply the insurer’s maximum, usually around 75% of that figure, sometimes structured as a lower base benefit plus additional components.
3. 3Check what your employer would pay and for how long, and what ACC would pay if the cause were an accident.
4. 4Decide the waiting period against your ability to bridge the gap.
5. 5Sanity-check the monthly benefit against your actual essential outgoings, not your income — if 75% does not cover the mortgage and food, the structure needs another look.

Two things routinely surprise people at claim time, and both are avoidable if they are explained at the start.

Offsets

Income protection is designed to prevent you being better off disabled than working, so most policies reduce the benefit by other income you receive while disabled. ACC weekly compensation is the big one — where the cause is an accident, ACC may pay up to 80% of pre-injury earnings, and the insurer’s benefit reduces accordingly, sometimes to almost nothing. Other income protection policies, employer sick leave, and certain other payments can also be offset. This is why holding two income protection policies rarely doubles your benefit.

Tax

The general position in New Zealand is that where premiums are deductible the benefit is taxable, and where premiums are not deductible the benefit is not. Indemnity and loss of earnings cover is generally structured with deductible premiums and a taxable benefit; agreed value structures can differ, and some policies are deliberately written so that the benefit is received tax-free. The distinction affects how much cover you actually need, because a taxable benefit of 75% of income is not 75% in your hand. Confirm your own position with your accountant before you set the sum insured.

Every New Zealand insurer writes income protection 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.

• Occupation classification drives both price and availability, and the same job can be classed differently by different insurers.
• Agreed value availability has narrowed in New Zealand — who can still get it, and on what evidence, changes and is worth checking current appetite.
• Offset clauses differ: some policies offset ACC dollar for dollar, others apply a partial offset or a top-up structure.
• Some insurers pay a partial or proportionate benefit when you return part-time; the calculation methods differ substantially.
• Mental health conditions are often subject to shorter benefit periods or exclusions, and appetite differs sharply between insurers.
• For the self-employed, how the insurer defines income — drawings, shareholder salary, retained profit — decides what you can actually 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.