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Income protection insurance

Income protection can help you out if you can't afford to go without pay.


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Would you struggle to pay the bills if you had to take unexpected time off work? That’s where income protection can help.

It’s designed to step in and replace your income by up to 75%, should you become sick or injured. You can just set up your monthly bill, and have peace of mind knowing you’re covered if something happens.

What is income protection insurance?

Income protection insurance is a financial safety net – it pays you a percentage of your wage, for a set period, if you can’t work due to a sudden illness or injury.

So, if you’re unlucky enough to develop a serious illness, and can’t work for six months, you receive regular payments from your insurer – meaning you could focus on getting better without falling behind on the bills.

For a monthly payment, income protection insurance gives you peace of mind if you become too sick or injured to work.

ACC in New Zealand

The Accident Compensation Corporation (ACC) provides a more specific type of cover as it protects you in the event of an accident but not an illness. However, if an injury is due to a pre-existing condition you may not receive payment. ACC covers you for some medical costs, for example, physiotherapy and up to 80% of your salary while you are recovering from an accident.

What does income protection insurance cover?

Basically, income protection insurance covers your wage or a percentage of it. Imagine you’re stuck in a hospital for six months, or you’re recovering from major surgery and can’t work. Income protection insurance ensures you still receive regular payments, so you can keep up with everyday expenses without getting into unnecessary debt.

How much you are paid, and for how long, varies depending on which insurance policy you choose. You could take out a policy which pays 75% of your wage for five years, or you could take out a policy which pays 50% of your wage for six months. Both have their benefits; it’s about what’s right for you.

You can spend the money however you like, as it’s just a replacement for your normal wage, but it’s designed so you can continue paying your bills, avoid the stress of debt and cover any medical costs that you may incur.

How to compare income protection policies

When looking for income protection insurance, there are a few important features to consider, and it’s worth making sure you clearly understand each one.

  1. Maximum monthly benefit – Your monthly benefits are what you receive from your insurer if you can’t work, but insurance companies put an upper limit on how much they pay out – this is your maximum monthly benefit.
  2. Maximum percent of income covered – Income protection insurance policies won’t cover the full amount of your wage. Instead, they promise to pay you a percentage of your normal salary. You can choose to pay higher premiums to cover a larger portion of your salary, or you can make your policy more affordable by covering a smaller portion.
  3. Maximum benefit period – This is the length of time you receive benefit payments as long as you still meet the policy requirements and can’t work. Typical benefit periods run from six months to five years, with longer benefit periods having higher premiums.
  4. Waiting period options – This is the period of time you have to be incapacitated or unable to work before you receive your benefit. Shorter waiting periods bring higher premiums but help you pay the bills sooner. Make sure you can survive the waiting period financially without your normal stream of income.
  5. Age restrictions – Income protection policies have a maximum entry age as well as an expiry age. The maximum entry age is the oldest you can possibly be when you first buy your policy. The expiry age is the age at which your policy no longer pays out.
  6. Agreed value vs indemnity. Agreed value insures you for a percentage of your income when you take it out and doesn’t change over time. Indemnity policies evaluate your income at the time of the claim and offer a percentage of that. Indemnity policies are often cheaper.
  7. Type of premium. A level premium stays the same. Stepped premiums start out cheaper than level premiums but get more expensive over time. Consider stepped premiums if you only intend to hold the policy for a short period.
  8. Optional extras. Some income protection policies offer redundancy cover, which can help if you are made redundant in your job or might provide rehabilitation benefits to get you back on your feet and working sooner. Other policies provide reimbursement of any extra childcare costs whilst you recuperate. Consider the provider’s extras and decide if they benefit you

What types of income protection are available?

You can choose between two different types of income protection insurance: agreed value and indemnity value.

Agreed valueThe more expensive of the two, agreed value insurance guarantees you receive a monthly benefit which was agreed upon at the start of your policy. It’s particularly good for people who may have a fluctuating salary but want to be certain they’ll receive a set benefit.
Indemnity valueCheaper and more common, indemnity value insurance doesn’t necessarily guarantee you receive the monthly payments you wanted when you bought your policy. If you make a claim, your insurance company verifies your income at that point in time – so if you’ve taken some time out, or the business you own has had a tough few months, you might not receive exactly what you had in mind.

What isn’t covered under income protection insurance?

Every income protection insurance policy has its own exclusions, so it’s essential you read your product disclosure statement (PDS) carefully.

As an example, exclusions could be anything from certain diseases, such as cancer, to injuries sustained while you were taking part in a dangerous pastime, like snowboarding. Pre-existing conditions may also be ruled out.

There are also time restrictions on policies. Insurers enforce a waiting period, so you can only claim if your illness or injury keeps you out of work for a specific length of time. Typically, the waiting period is somewhere between two weeks and three months.

Insurance companies also implement a maximum benefit period, so you can only claim payments for a certain length of time, usually between two and five years.

Does income also include cover for redundancy?

If you are made redundant, there are insurance providers that offer redundancy cover as an optional extra when you purchase an income protection policy. Redundancy insurance can come in handy if you find yourself out of a job, giving you some short-term financial assistance to get by.

However, redundancy cover won’t cover you if you resign. Usually, you need to meet your insurer’s definition of involuntary redundancy, which can include the following:

  • If you’ve been let go from a job that has been paying you a salary of some kind.
  • If you are self-employed and your business has ceased trading because you can no longer meet its financial obligations.
  • If a contract has been prematurely terminated and not by you (for example, it was for 12 months but was ended by the employer earlier).

Redundancy insurance can be helpful if you think there’s a chance you’ll be made redundant. Consider the work environment you are in and whether redundancies are common. You should also think about how easy it would be for you to find another job quickly. Make sure you check the waiting periods and no claim period on redundancy policies. If you do add it to your income protection cover, you don’t want to be waiting a long time for a payment to be made.

Is income protection the same as life insurance?

It’s important to note that your income protection insurance doesn’t provide any benefits if you die suddenly, so if you’re killed in a car crash or suffer a fatal heart attack, you don’t receive payments from your insurance policy.

However, some insurers provide a death benefit if you die while already claiming from your policy, which means that if you’re diagnosed with a terminal illness and begin claiming from your income protection policy but die 12 months later, you would receive a lump sum.

If you want your insurance policy to offer a payout for sudden death, you may want to consider life insurance in addition to income protection insurance.

Extra income protection benefits to boost your cover

Income protection policies offer both built-in and some additional benefits to give you optimal protection in the event of serious illness or injury. These benefits may include the following:

BenefitHow it works
Trauma event benefitA lump-sum benefit for trauma conditions that are specified in your policy
Death benefitA lump-sum benefit in the event you pass away
Needle-stick injury benefitThis additional cover pays a benefit if through the course of your occupation, you become infected with HIV or AIDS, Hepatitis B or Hepatitis C as a result of a needle-stick injury or splash injury
Bed confinement benefitA portion of your monthly benefit is paid for each day that you are confined to bed and require the full-time care of a registered nurse
Accommodation benefitThis cover reimburses an immediate family member’s accommodation costs if that family member travels over a specified distance to stay with you
Family care benefitThis pays a benefit if a member of your family is forced to take time off of work to care for you and suffers a reduction in their income as a result
Business expenses benefitThis provides cover for fixed business expenses while you are disabled, which enables your business to stay afloat

These are just some of the benefits you may be able to receive under different policies. Each policy has details of exactly what’s covered in the PDS.

Frequently asked questions

Buying cover

Benefits and waiting periods

  • Payout eligibility and disability definitions

    Your policy

    Your benefit

    Your premium

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