Life insurance and income protection: Do Kiwis need both?

Life insurance vs income protection: Key differences

Life insurance pros and cons

Life insurance pays a lump sum to beneficiaries if the insured dies or is diagnosed with a terminal illness with a life expectancy of 12 months or less. It shields loved ones from having to deal with the financial pressures that arise after losing a main income earner or member of the family who provides unpaid work.

Pros

• Cover for immediate expenses: Policy proceeds can be used for immediate expenses, such as funeral costs, outstanding debts, and routine financial outgoings.
• Cover for major expenses and long-term goals: The payout can be used to repay large debts, like a mortgage, and to help your family stay in their home while avoiding financial hardship. It can also fund long-term goals, such as children’s tertiary education or a surviving partner’s retirement.
• Life insurance premiums are typically more affordable when you take out cover at a younger age and while you're in good health. 
• Available to non-income earners: Stay-at-home parents, unpaid carers, and homemakers can also get insured. Although non-income earners don’t bring in revenue, their role in the household is still financially valuable, from childcare and meal preparation to managing the home and supporting working partners - responsibilities that would be costly to replace.
• Options to broaden cover beyond death and terminal illness: You can add critical illness cover and total and permanent disability (TPD) cover as accelerated benefits to your life insurance policy. This option is cheaper than getting all three covers as standalone plans. 

Limitations

• Limited living benefits: A standard life cover plan only pays out if you pass away or are diagnosed with a terminal illness and likely to die within 12 months. It won’t provide financial benefits if you have a serious but non-fatal injury or illness needing long-term recovery, unless you’ve added these options.
• It may not be an insurance priority for everyone: If you don’t have dependants, big debts, or other financial commitments, life cover might not be your priority.

Want to know more? View the list of benefits and sample quotes on our life insurance comparison page or contact Policywise for personalised advice.

Income protection pros and cons

Income protection pays a monthly benefit if you’re unable to work due to illness or injury. It’s designed to replace a portion of your income, helping you stay on top of bills, rent or mortgage payments, and everyday living costs while you recover.

Unlike life insurance, which only pays out if you die or are diagnosed with a terminal illness, income protection supports you during your lifetime, specifically during periods when you’re unable to earn.

Pros

• Goes beyond what ACC covers: The Accident Compensation Corporation (ACC) offers compensation for accidents and treatment-related injuries as well as work-related gradual process injuries. But ACC does not extend support for serious illnesses. Income protection insurance fills this gap, providing financial assistance when conditions like cancer or stroke prevent you from working for several weeks or even years.
• Supports you when you run out of (or don’t have) paid leaves: While most employers offer paid sick leave, it’s typically limited to just a few days or weeks. If your illness or injury keeps you off work for several months or years, your sick leave will run out, leaving you and your dependants without an income. 
  
  If you’re self-employed or a small business owner, you won’t have employer-paid leave benefits to rely on if you can’t work. Income protection can help meet your living expenses, business costs, and family commitments while you focus on recovering.

• Provides partial disability benefits: Many policies include a partial disability benefit, which is especially helpful if you’re able to return to work but only in a very limited capacity. This helps ease financial pressure during your recovery and supports a gradual return to work.
• Your income may stop, but the bills won’t: If you're unable to work, your income may cease. However, the bills don’t stop coming; in fact, they might even increase due to medical costs. Your benefits help you keep up with your regular expenses and any additional costs related to your health condition and recovery. 
• Extra support beyond monthly payments: Aside from monthly payments, income protection typically includes extra financial support for vocational programmes, specialised equipment, rehabilitation, and assistance with returning to work.
• Customise your cover to suit your needs: You can tailor your policy according to your premium preference, the percentage of income you’d like to insure, waiting period (how long you’ll wait before receiving payments), and benefit period (how long you’ll receive these payments). 

Limitations

• Benefits end upon death of the insured: Monthly benefits stop when the insured dies, leaving family members with no financial resources to cover ongoing living expenses.
• Eligibility depends on meeting the insurer’s definition of disability: If you’re unable to work but don’t meet the insurer’s definition of a total or partial disability or don't suffer a covered severe illness, you won’t receive any benefit.
• Waiting periods can delay support: Waiting periods apply. During this time, you won’t receive benefits and will have to rely on other resources (e.g., paid leaves, savings) for your expenses. 
• Redundancy isn’t usually covered: Standard income protection does not cover job loss due to redundancy. If you’re made redundant, you won’t receive payments unless you’ve added redundancy cover to your policy.
• Pre-existing conditions may be excluded: If you’ve had past health issues, they may be excluded from your cover, meaning you can’t claim for them later.

Want expert help comparing the best income protection plans? Contact Policywise to get personalised advice and quotes.