Income protection for self-employed people

Whether you’re just thinking about working for yourself or you’ve already taken the plunge, it’s important to think about how you’d cope if you couldn’t work due to an illness or injury. This article covers the main features of income protection insurance for self-employed people. It’s designed to help you understand the main options before talking to a financial adviser or insurance broker.

What is income protection insurance?

If you’re unable to work due to injury or illness, income protection insurance can pay an agreed percentage of your normal income in monthly instalments. There are many options to choose from, which we discuss below. These make it easy to create a policy based on what you need and can afford.

Why is income protection important for self-employed people?

When you’re self-employed, you’re the most important asset in your business. There’s no employer-funded sick leave and no-one to hold your job open until you return. If you’re unable to work for an extended period, your hard-earned savings will be depleted. You could struggle to meet your financial commitments and support your family. Your business can suffer catastrophically and potentially fail.

Don’t ACC and WINZ provide income protection?

Many people think ACC will pay out if they can’t work, but it only covers accidental injuries, not illnesses. If you do receive payments from ACC, they’ll usually expect you to do any type of work you’re capable of doing (not just your normal work) as soon as possible.

If you receive compensation from ACC, an income protection policy will only top it up to the level of cover defined in the policy. You don’t get full cover from both.

ACC usually pays up to 80% of your normal income. However, self-employed people who work at least 30 hours a week can opt for ACC’s CoverPlus Extra product. This lets you set the level of income you want to be covered and the levy is adjusted accordingly.

In most cases, long periods off work are caused by an illness not an injury. If you can’t work due to an illness, you would have to rely on Work and Income (WINZ) benefits, such as Jobseeker Support. This may not cover your financial commitments. For example, for the year to 1 April 2024 Jobseeker Support pays up to $335 a week after tax if you’re 25 or older and single. If you’re earning some income, the payment reduces accordingly. If you’re 25+ and single, it cuts out completely when you earn $643 a week or more before tax. You may also qualify for extra help, such as an accommodation supplement, disability allowance and temporary additional support.

If you have a spouse or partner who works, their income is taken into account when considering your eligibility for WINZ income support benefits. If your partner works less than 30 hours a week (or not at all) and has no dependent children under 14, WINZ may expect them to take any offer for suitable additional work. If their youngest child is aged 3-13, your spouse or partner would be expected to accept any suitable part-time work of at least 20 hours a week.

What are the main income protection insurance options?

Each of these options will affect the premium you pay. This makes it easier to create a policy that suits your budget and prioritises your most important requirements. Here are some of the main options you can usually choose from.

  • Pay-out amount – Income protection policies usually pay a monthly income. You can choose the amount you’d need, usually between 50% and 75% of your usual monthly income. The higher your monthly payment will be, the higher the premium.
  • Wait period – This is the agreed time from when you stop work due to illness or injury and when your monthly payments will start. A longer wait time means a lower premium.
  • Payment period – This is the agreed time that payments will continue for while you’re unable to work due to illness or injury. You can typically choose from one to two years right up until a retirement age, like 65. A longer time means a higher premium.
  • Incapacity definition – This refers to a policy’s definition of the type of work you must be unable to do, in order to receive the monthly payments. It can vary between insurers so it’s important to check when comparing premiums. The best one is ‘own occupation’. This means if you can’t do your normal work due to illness or injury the payments will continue for the agreed period or until you’re capable of returning to your normal occupation. Next best is called something like ‘suitable occupation’. This usually means it will only pay out while you’re unable to work in any occupation you might be reasonably capable of, regardless of the pay it offers. The least helpful definition is something like ‘any occupation or work task’. It basically means that if you can listen or walk for example, then you’re expected to find a job that uses those abilities. It would only pay out if you had a severe illness or injury, so it’s probably best avoided if you’re self-employed.

How much does self-employed income protection cost?

In addition to the options above, the cost of income protection insurance will depend on your age (older costs more), gender (male costs more), health and the risk of illness or injury associated with the type of work you do. Not many things will exclude you from cover completely, but some pre-existing health conditions may not be covered or you may have to pay a higher premium to have them included.

For the maximum 75% monthly payment, a four-week wait period and a two-year payment period, a non-smoker aged about 40 and earning around $80,000 a year might pay $2,000 to $3,000 a year in premiums. If they wanted the payments to continue until they’re 65, in case they were still unable to work, the annual premiums could be about twice as much.

Next steps

If you’re interested in income protection insurance, it’s important to talk to a financial adviser or insurance broker. Their market knowledge and experience can help you find the right policies for your needs at competitive prices.

In the meantime, you might like to read our complete guides to:

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute an insurance advice service. It is only intended to provide education about the New Zealand insurances sector. Nothing in this article constitutes a recommendation that any type of insurance cover is suitable for any specific person. We cannot assess anything about your personal circumstances, all of which are unique to you. Before making insurance decisions, we recommend you seek assistance from an insurance adviser or expert.

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