Insuring Your Income, What Is The Best Income Protection?

Every year, many thousands of Kiwis lose the ability to work due to illness or injury—about 300 households a week are affected. While many get back to work within a reasonable period of time, not everyone can.

There are many scenarios where you become unable to work long-term. Whether it’s a long-term illness such as cancer, a terminal prognosis like MS or ALS, or you suffer a career-ending injury, the outcome is the same: No job, no income and no way to pay your bills.

The sickness benefit from the NZ Government is around $350 a week. This also may be reduced or annulled by your partner’s earnings. Many Kiwis find themselves too rich to qualify for a sickness benefit, but unable to pay the bills. This doesn’t just impact your day-to-day life, but also your long term dreams, goals and retirement plans.

There is income protection insurance though. This insurance means that if the unthinkable happens, you have income until you return to work, reach retirement age, or die.

What are the basics of income protection insurance?

It’s a type of insurance that ensures individuals receive a certain percentage of their income if something happens rendering them unable to work. There are two types of income protection insurance, short and long term.

Short term income insurance is usually for two to five years and covers a certain percent of your monthly income, generally around 60- 75%. This means you would receive enough money to pay your bills and live in some level of comfort. It’s great for young people, renters, people with fluctuating incomes or people wanting lower premiums. However, there are a range of conditions that are normally excluded, such as strokes. Payment may only be assured for a shorter time period and not up until retirement.

Long term plans cover income up until retirement. Again, only a certain percentage of your monthly income (normally about 75%) will be paid out on a claim. However, long term plans cover more conditions. As the insurer is taking on more risk (longer payout time frame and wider coverage) higher premiums apply making this a more expensive option that not everyone can afford.

Income protection insurance is not to be confused with a life insurance plan or a trauma/ critical illness plan, which pay out large lump sums. This is a monthly pay out that replicates a salary or wage.

But what about ACC?

ACC covers 80% of your income you if you have an accident that means you can’t work. It doesn’t cover illness, stroke or disabilities. If these scenarios were added to ACC’s cover, it would increase levies hugely, adding to costs for employers.

Should this be part of KiwiSaver?

The short answer is, maybe. In Australia, the Superannuation Guarantee Scheme has compulsory membership, so everyone is covered for some level of life and income protection. While the industry has suggested this be bundled into KiwiSaver, this is not likely to happen any time soon. It’s wise to consider this for yourself and arrange your own cover.

What does this mean for you?

When you look at your financial situation, do you panic or is it under control? What happens if the main income earner suddenly is unable to work? How does that mortgage repayment look now?

It’s recommended that Kiwis have about six months’ worth of living expenses saved. Even if you have this, you’ve only got six months of being able to pay the bills… then what? Do you rely on friends and family? Set up a givealittle?  Worse still is you will forced to abandon your retirement plans and other dreams. Forget helping your children get into their first home or donating to your favourite cause. Should the unthinkable happen when you have no income protection cover in place, you may only have a one way ticket to struggle street left.

Long term protection offers more benefits

If you’re considering income insurance, then opting for a long-term plan is superior to short term in many ways. You know how much the premium is every month, and what level of cover can be realistically expected. Serious conditions such as MS are more likely to be covered than a short-term plan, and it will also cover things like strokes or heart attacks which may render someone unable to work ever again. It guarantees income is paid up until retirement rather than just a shorter term set period. In general, long term plans are more comprehensive and are more useful.

How much does income protection insurance cost?

The premiums for income insurance vary depending on age, current job, income level and health. If you are a smoker, it will cost you more. The higher your income and the bigger percentage of income you want the insurance to cover, the higher the premiums. The older you are, the more expensive income insurance becomes.

You can also often extend the stand-down period where you don’t receive benefits after your sick pay ends. If you have that six-month savings buffer, this allows you to do this, which decreases the premium cost.

Check with your insurer or financial advisor

If you’re unsure how best to go about insuring your income, speak to the professionals. A financial advisor such as Sam Kodi will be able to assess what type of insurance you need, and possibly advise on which insurers will be best for your scenario. Your existing insurer may be able to offer a package for all types of insurance, bringing the overall premium cost down.