Income protection and tax

Income protection is the one personal insurance where tax genuinely drives the design decision, and where getting it wrong costs money for as long as the policy runs. It follows from a single principle: a payment that replaces taxable income tends to be taxable, and the cost of producing taxable income tends to be deductible.

Applied to income protection, that gives you two coherent arrangements. In the first, the premiums are deductible to you and the monthly benefit is taxable when you claim — the benefit is standing in for the salary or drawings you would have earned, and is taxed accordingly. In the second, the premiums are not deductible and the benefit is received without tax. Both are internally consistent. What does not exist is the combination everyone would like, where the premiums are deductible and the benefit is tax-free.

In practice, indemnity and loss-of-earnings policies in New Zealand are usually written the first way, and some agreed-value structures are written the second. But this is not a rule you should assume applies to your policy. It depends on the policy, the structure, and your own tax position.

Two effects run in opposite directions, and you need both in view to compare properly.

1. 1A deductible premium costs you less after tax. The effective cost is reduced by roughly your marginal tax rate, so a policy that looks more expensive on the quote can be cheaper in the hand.
2. 2A taxable benefit is worth less when you claim. If the benefit is taxed, the monthly amount you actually receive is lower than the amount on the schedule — again by roughly your marginal rate.
3. 3Which means the sum you insure has to change. Cover set at 75% of gross income means something quite different depending on whether the benefit is taxed on receipt.
4. 4And the comparison has to be run after tax. Comparing a taxable benefit against a non-taxable one at face value tells you nothing useful.

One second-order point. Where the benefit is taxable it interacts with your other income for the year, so the effective rate applied can be higher than you expected.

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

• Which structure your existing policy actually uses. Many people do not know, and it is written into the policy documentation.
• Whether the premiums are being claimed as a deduction, and whether that matches the benefit treatment.
• Whether an offset for ACC or other income is calculated on gross or net amounts.
• Whether business expenses cover, which is a separate product, is included and how it is treated.
• Whether cover is held personally or through a company, which changes both sides of the equation.
• Whether a change of structure is possible without new underwriting, if the current one is wrong for you.

Every New Zealand insurer writes income protection cover 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.

• An adviser will raise the tax structure question before the application, which is the only point at which it is a free decision.
• They can quote both structures side by side so the comparison is on an after-tax basis rather than a headline premium.
• They will size the benefit correctly for the structure chosen, which is where under-insurance quietly creeps in.
• They co-ordinate with your accountant rather than guessing, and will say plainly that the tax question is the accountant’s call.
• At claim time they can check that offsets and deductions are being applied the way the policy says.

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.