Is income protection insurance worth it? Do Kiwis need it?

What is income protection insurance?

Income protection insurance replaces a portion of your income if you're unable to work due to illness or injury. It provides monthly payments, up to 75% of your monthly income, to help cover living, medical, and other expenses during your recovery.

When setting up your policy, you'll also choose a waiting period: the time between becoming unable to work and when payments commence. Common waiting periods range from two weeks to two years. 

Do I need income protection insurance?

Here’s why income protection is worth considering:

• ACC primarily covers accident and work-related injuries. Health conditions which may result in long-term work absences, such as cancer or stroke, aren’t covered.
• If you can’t work due to an illness or injury, you might qualify for Jobseeker Support, however, its flat weekly rate may not be enough to cover your rent and bills or support a family.
• Hospital care and GP visits may be subsidised or free, but you still need money to pay your mortgage or rent or put food on the table while you’re recovering.
• Most employees only get 10 paid sick leave days per year. A serious illness or injury can keep you off work for months, or even years. After your leave runs out, you’ll need another source of income.
• While personal savings may be sufficient to cover a short-term absence from work, an injury or illness lasting months could push you towards debt. In such cases, the ongoing monthly payments provided by your income protection insurance can keep you and your family afloat until you can get back to work.
• If you’re self-employed or a business owner, you don’t have employer-provided sick leaves. Income cover can keep your household running while you recover.

You should consider getting income protection insurance if:

• You’re employed, self-employed, or a business owner who relies on your income to cover rent, mortgage, bills, and other financial commitments
• You don’t have paid sick leave entitlements
• You support children, a partner, or other dependants
• You’d struggle financially if you couldn’t work for several months or longer
• You don’t have family members who can provide long-term financial support in case you need to stop working.

Who doesn’t need income protection cover?

Income protection might not be necessary if:

• You have substantial savings, sufficient pension, or passive income you can live on for a long time
• You have a family member earning enough to cover your household’s expenses.

What does income protection insurance cover?

Here’s a look at some of the base benefits of income protection cover. These benefits may vary across different income insurance plans:

• Total disability benefit: If you become totally disabled as a result of an illness or injury, you will receive a monthly benefit at the end of your chosen waiting period.
• Partial disability benefit: If you’ve been totally disabled or partially disabled during the waiting period, and then return to work with a partial disability, a monthly benefit may be payable once the waiting period ends.
• Rehabilitation and recovery support: This benefit helps cover the cost of approved rehabilitation programmes. It also helps cover the cost of specialised equipment, including wheelchairs, artificial limbs, or changes to your house or car.
• Vocational assistance support benefit: If you can no longer go back to your pre-disability occupation, this benefit helps cover your vocational programme expenses and other costs to help you transition to a new career.
• Other financial benefits: Some plans also provide additional financial support for bed confinement, childcare, and for your full-time family carer. 

What are the advantages of having income protection cover?

• Replaces lost income: If you’re unable to work because of an illness or injury, income protection pays you a monthly benefit. This means you can still cover your essential living costs, even if you’re not earning.
• Peace of mind: Knowing you’ve got financial backup allows you to focus on your recovery. It also reduces stress for your partner or family, who may otherwise need to pick up the slack financially.
• Support for faster recovery: Some policies offer rehabilitation and return-to-work support. This might include physio, occupational therapy, or career counselling to help you get back to work sooner.
• Keeps long-term goals on track: Being off work long-term can disrupt your financial future. Income protection helps you continue contributing to your KiwiSaver, pay off debts, or save for your children’s education, even while you’re recovering.

What are the limitations of income protection cover?

Income protection insurance has its limitations. Here are a few to be aware of, and some tips to help:

1. Doesn't cover job loss due to redundancy 

Most insurance plans don't include redundancy benefit in their base cover. If you lose your job due to redundancy, you won’t receive payouts from your policy to help replace lost income.

TIP: Check if your insurer offers redundancy cover as an add-on and consider purchasing it. Alternatively, you may build an emergency fund to cover potential job loss.

2. Payments may be offset by ACC or other benefits

Your monthly benefit will be reduced by other benefits you’re entitled to for the same illness or injury, such as paid sick leaves, ACC payments, and mortgage protection benefits.

TIP: Review the policy’s terms or talk to your insurance broker to understand how income insurance benefits are calculated. 

3. Waiting period before payments start

There’s always a waiting period before you start receiving your benefit. You’ll need to rely on your sick leave, savings, and other financial sources during this time.

TIP: When choosing a waiting period, consider how long your savings and other resources could support your family if you needed to stop working. If you have significant savings or alternative financial resources, consider choosing a longer waiting period, which also helps reduce your premium.

4. Limited benefits for dependants in case the insured passes away

Some income insurance plans provide limited financial assistance for funeral expenses, while others don't cover this, or they may offer it as an optional add-on. Income insurance plans also cease when the insured passes away.

TIP: If you’d like to have your funeral expenses covered, choose an income insurance plan that provides a death benefit as part of its base plan or as an add-on. If you’re concerned about your dependants’ financial security if you pass away, consider getting life insurance. It provides a lump sum benefit which can help cover your family’s living expenses, debts, or future needs, like education costs.

5. No immediate funds for significant critical illness expenses

Income protection doesn’t offer a lump sum amount to use for expensive private medical treatments if you’re diagnosed with a serious illness.

TIP: If you wish to have additional resources in case of critical illnesses like cancer, find an income insurance plan with a critical/severe illness benefit add-on or consider getting a separate trauma insurance plan.

How can you lower your premiums?

There are several strategies to manage and reduce costs while maintaining adequate cover.

• Consider insuring a lower percentage of your income. If your expenses are significantly less than your income, you may consider insuring a smaller percentage of your earnings to get lower premiums.
• Choose a waiting period that’s appropriate to your circumstances. Calculate your monthly expenses and assess your savings, paid sick leaves, and other resources to determine how long you can manage without income. A short waiting period will provide benefits sooner, but premiums are higher. A long waiting period will have a lower premium, but you need to ensure you have funds to keep you going until your cover pays out. 
• Consider whether short-term cover will be enough. Choosing a shorter benefit period, such as 2 or 5 years instead of until age 65 or 70, lowers premiums as it reduces the insurer’s long-term payout obligation. Keep in mind, though, that if your disability lasts beyond your chosen benefit period, you’ll need to rely on other financial sources from then on.  
• Compare income insurance plans and quotes. Premiums as well as benefits vary across insurers. That’s where working with an insurance broker, like Policywise, really pays off. We’re not tied to just one insurer, which means we can compare options across the market and help you find competitive rates for the cover you need.

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Protect your income with the help of Policywise!

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