If you rely on your income to pay bills or support your family, income protection insurance is one of the most practical options available. It provides regular payouts if you’re unable to work due to illness or injury, helping you cover your everyday expenses and maintain stability. But many policyholders, even long-standing ones, are often unclear about what their income protection policy covers, when they can claim, and how ACC fits in. We’re also frequently asked about redundancy cover and whether it’s worthwhile getting mortgage protection insurance too. So let’s break it down.
What is income protection insurance?
Income protection insurance steps in to replace a portion of your income if you can’t work for a period of time due to sickness or injury. It gives you regular payments until you’re able to return to work or until your policy’s benefit period runs out. What’s great about this type of insurance is that it’s flexible – you can use the money for mortgage payments, rent, groceries, bills, or other expenses, helping you manage financially while you’re out of action.
Who benefits from income protection insurance?
Whether you’re employed or self-employed, if your income covers your living costs, income protection insurance can be a real lifesaver. If you have limited sick leave, or none at all, it helps you stay afloat when you’re unable to work for a while. It’s especially helpful if you’ve got kids or others who rely on you, making sure you can keep supporting them. Plus, it covers important expenses like your mortgage and bills, so you don’t fall behind during tough times.
What does your income protection policy cover?
Your policy covers a wide range of situations that prevent you from working, including both physical and mental health issues. Each policy is different, so it’s important to review your specific policy to see exactly what’s included. But you’re usually covered for serious illnesses, long-term injuries, mental health conditions, and chronic illnesses that make working difficult.
Some income protection policies provide additional benefits and optional add-ons like rehabilitation cover, back to work payments, bereavement grants and more.
Does income protection insurance cover redundancy?
Income protection only applies if you’re unable to work due to illness or injury. Redundancy is not covered by your policy, but some insurers offer separate redundancy cover that you can add on. If you’re unsure whether your policy includes redundancy cover, it pays to check your policy wording or ask your adviser.
How does it pay out?
The way income protection works is that you get regular payments as a portion of your pre-disability income (up to 75%) – these payments are taxed as income by IRD. Some insurers will also offer access to partial payments as you return to full time work.
When you sign up for a policy, you can choose how long you want to wait before your payments kick in – this is called the waiting period, and it can be anything from a couple of weeks to a few months. The longer the waiting period, the lower your premiums. You can also choose how long the payments last, known as the benefit period. It could be two years, or it could be right up until you hit retirement age. The longer your benefit period, the more your premiums will cost – but it also means you’re covered for longer if something serious happens.
Where does ACC fit in?
If you’re eligible for ACC cover due to an accident or injury, ACC will pay first. Your income protection insurance treats this as ‘other income’ and will supplement the ACC payment, bringing your total to 75% of your pre-disability income.
But ACC has its limitations. It only covers incomes up to about $142,000 (2024-2025), and the legal definition of an “accident” can be stricter than expected, often excluding claims due to wear and tear. ACC is proactive in transitioning people off claims, sometimes prematurely. And ACC does not cover illnesses like cancer or stroke, which income protection insurance does.
Why do premiums increase?
If your premiums have increased, it’s likely because you chose age-rated premiums, which rise as you get older. If your premiums haven’t changed, you may have opted for level premiums, where the cost is fixed from the start of the policy. You might also see increases if your cover adjusts for inflation.
When are you entitled to a claim?
If you’re unable to work due to a condition covered by your policy, you can make a claim. Contact your insurer or adviser to start the process, provide the required medical documentation, and after the waiting period, you’ll start receiving payments. Make sure you’re familiar with any exclusions in your policy, such as pre-existing conditions, before making a claim.
How does income protection insurance differ from mortgage repayment insurance?
Income protection and mortgage protection insurance products both provide financial support if you’re unable to work due to illness or injury, but they serve different purposes.
While income protection insurance offers broad cover, mortgage protection insurance is designed specifically to cover your mortgage repayments, ensuring your home remains yours during times of hardship. A big advantage of mortgage protection insurance is that it doesn’t offset with ACC, meaning you can receive both ACC payments and mortgage protection payouts simultaneously.
In some cases, people opt for both types of cover: mortgage protection to safeguard their home and income protection to cover other everyday expenses. Each product has its benefits, and the choice depends on your specific situation and needs.
Is it worth it?
Even if you don’t have dependents, ask yourself if an extended period off work would make it difficult to cover your mortgage repayments, rent, bills or other everyday living costs. If the answer is yes, then income cover, mortgage cover (or both) is probably worth it.
If you can get by on sick pay or savings for at least 12 months, you’re nearing retirement and can rely on KiwiSaver or pension entitlements, or your partner or family can support you, then these products might not be right for you. But consider this: your ability to earn an income is likely your biggest asset. For instance, if you earn $80,000 annually and are 40 years old, that’s approximately $2 million in future income that could disappear if you’re no longer able to work.
Unsure about the details of your existing policy or keen to review your options? We’re here to assist. We can help you find the right protection and ensure your income stays secure, no matter what life throws your way. Get in touch.