The complete guide to income protection insurance

Your ability to earn an income is potentially the most valuable thing you have. Without it, you’d be relying on savings, selling assets, and the kindness of family and friends. That’s why income protection cover is relevant to every New Zealander with a job.

The health risks that can quickly derail your income are long-term sickness and recovery from a serious accident. These are things that you read about every day in the newspaper. Income protection helps to balance this risk by providing a monthly income when you can’t work.

Here are three good reasons to consider getting income protection cover:

  • Income protection ensures financial stability when ongoing illness or injury recovery leaves you unable to work. By replacing a percentage of a your lost income, it lets you meet your financial obligations, such as mortgage payments, bills and daily expenses, without exhausting your savings or relying on others for support. Some policies also provide protection against redundancy.
  • Income protection allows you to maintain your current standard of living, which helps you avoid a significant lifestyle downgrade.
  • Depending on the payment continuation period, income protection offers long-term financial security. It can provide coverage until retirement age or even longer, depending on the policy you choose. This extensive coverage ensures you’re protected against long-term disabilities that could significantly impact your ability to earn an income.
  • It complements other insurances you may have. While health insurance covers medical expenses and life cover provides financial support to your loved ones if you die, income protection insurance focuses solely on replacing lost income due to sickness or injury.

What is income protection insurance?

Here’s a quick snapshot of income protection – the what, why and when.

  • Purpose: Income protection insurance is designed to provide a replacement income if you are unable to work due to sickness or injury. When you start your policy, you need to choose a ‘wait period’ – the time between making a claim and payments starting.
  • Benefits: The monthly payments from income protection insurance can be used for any purpose. They can help with expenses such as rent or mortgage payments, bills, daily living costs, medical expenses and other financial commitments.
  • Relevance: Income protection insurance is relevant to everyone who earns a living, because it protects your independence and financial position. It can also be relevant if you’re in unpaid work, such as looking after children at home, because it can be used to pay another person to do the childcare while you’re sick or injured.

What’s the difference between income protection insurance and mortgage repayment insurance?

Income protection cover and mortgage repayment cover are quite similar. The main difference is that income protection cover pays you a percentage of your income (e.g. up to 75%), while mortgage repayment cover pays either a percentage of your income (e.g. up to 45%) or a percentage of your mortgage repayments (e.g. up to 115%).

Both insurances let you use the money you get from a claim for anything – rent, mortgage repayments, rates, utilities, food and other living expenses.

Also, both insurances require you to choose a waiting period (the time you have to wait before payments can start) and a payment term (the length of time payments can be paid).

How much income protection cover can you get?

Income protection cover typically covers a percentage of your income, which helps you meet your living expenses and financial obligations during the period you are unable to work. Typically, you will choose a monthly payment that’s a percentage of your current average monthly pre-tax income. For example, 60 or 75%. The insurer will put a limit on this monthly payment, for example $12,000 a month.

Along with choosing the amount of income protection you have, you need to choose a waiting period, the time you have to wait before monthly payments can start. You’ll generally be offered a range of time periods, from two weeks to two years.

The other choice you need to make is how long you want payments to potentially continue for after you’ve had to stop work. The payment continuation options vary between insurer, for example one insurer offers 6, 12, 24 or 36 months; another offers 2 years, 5 years, to age 65 or to age 70.

Income protection features and extras

No two income protection policies are exactly alike, but typical features and optional extras are:

  • Recurrent sickness benefit: Your waiting period will be waived if you become sick again from the same or a related cause within 12 months of your income protection payments ceasing.
  • Waiver of premium: While you’re receiving monthly payments from a claim, your premium payments will be waived.
  • Optional redundancy cover: Some insurers offer an optional redundancy benefit. It doesn’t usually apply during the first six months of cover.
  • Vocational assistance if you need to retrain: You might get financial assistance for retraining, if you’re unlikely to return to your previous occupation.
  • Home modification and special equipment: Your insurer may agree to cover the costs of buying specialised equipment (wheelchair, prostethics, vehicle modifications) or completing home alterations that have become necessary due to your accident or sickness.
  • Care benefit during wait period: During your wait period, your insurer might pay for full-time care while you’re confined to bed.
  • Home care benefit: Provides an additional benefit payment for the services of a carer while you recover. This payment could apply for a family member who stops working to look after you.
  • Relocation benefit: If you become sick or are injured while outside New Zealand, the insurer may pay relocation costs to return you to New Zealand.
  • Childcare support benefit: Compensation if your sickness or injury results in additional childcare costs for any child under the age of 14.
  • Pause your cover: Flexibility to suspend your cover for up to 12 months if you take parent leave, become unemployed or are struggling to make premium payments. No cover will apply during the pause.

What does income protection cover cost?

The cost of income protection insurance depends on things like your age, occupation, salary, health status, lifestyle habits and medical history. Prices vary between insurers, but here’s a rough idea of what it might cost:

  • About $100 a month for a 40-year male plumber who earns $90,000 a year and is covered by 75% of his usual income. He has a 8-week wait period and a payment period of two years.
  • About $70 a month for a 35-year female classroom teacher who earns $70,000 a year and is covered by 75% of her usual income. She has a 8-week wait period and a payment period of two years.

What are the exclusions?

The specific exclusions for an income protection policy in New Zealand can vary, depending on the insurance provider and the policy terms. However, here are some common exclusions that you may find in many income protection policies:

  • Pre-existing conditions: Income protection policies often exclude coverage for any disability or illness that existed prior to the policy’s start date. So if you have a medical condition or injury before taking out the policy, related claims may be excluded.
  • Self-inflicted injuries: Intentional self-inflicted injuries or illnesses are typically excluded. This exclusion is to prevent people from purposely causing harm to themselves and then making a claim.
  • Drug or alcohol-related conditions: If a disability or illness is caused by drug or alcohol abuse, it may not be covered.
  • War or acts of terrorism: Income protection policies may exclude claims related to injuries caused by war, civil unrest or acts of terrorism.
  • Criminal activities: Sickness or injury resulting from engaging in criminal activities or illegal acts may be excluded from coverage.
  • Intentional non-disclosure: If you fail to disclose relevant information about your health or occupation during the application process, it may lead to a claim being rejected.

What medical information do you need to provide to get income protection insurance?

To get income protection insurance in New Zealand, you will typically need to provide health and lifestyle information during the application process. The specific requirements may vary depending on the insurance provider and the policy you choose, but generally, the following information is requested:

Medical history: An accurate summary of your medical history, including any pre-existing conditions, previous illnesses, surgeries and ongoing treatments. You’ll probably also be asked about any medications you take or have taken in the past.

Current health: You may need to answer questions about your current health status, including any symptoms, diagnoses or ongoing medical issues.

Lifestyle and habits: Life insurance providers often ask about your lifestyle choices, such as smoking, alcohol consumption, exercise routines and any high-risk activities you engage in.

Family medical history: Some insurers ask about the medical history of your immediate family members, as certain conditions can have a genetic component.

Medical examinations: You might be asked to undergo a medical examination. This can involve tests and physical assessments conducted by a qualified healthcare professional.

Permission to request information: Additionally, the insurance provider may ask for access to your medical records to verify the information provided.

It’s important to provide accurate and complete information to the best of your knowledge. Failure to disclose relevant medical information could result in a denied claim or cancellation of your policy.

How to get started with income protection insurance

Before you sign up for income protection insurance, it’s advisable to consult with a financial adviser who specialises in life insurance. This way you can compare a range of policies from different insurers. Some will suit your needs better than others. Your adviser can also explain the features and benefits of each option, along with exclusions that might affect you.

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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