Definition
Income protection insurance in New Zealand is designed to provide you with a regular income if you are unable to work due to illness or injury. This type of insurance is vital for ensuring financial stability by replacing a portion of your income during recovery periods.
How It Works
Income protection insurance in New Zealand typically covers up to 75% of your gross monthly earnings before you were unable to work. Benefits are paid after a waiting period and can continue until you are able to return to work, the policy term expires, or you reach retirement age, depending on your policy terms.
Key Features
Deferred Period: Also known as the waiting period, this is the time between when you become unable to work and when benefits start. Common deferred periods in New Zealand range from two weeks to two years, with shorter periods generally resulting in higher premiums.
Benefit Period: This can vary from a few years to until you turn 65 or 70, offering flexible options based on your needs and career plans.
Level of Cover: Policies allow you to choose the level of income you wish to insure, which directly affects the premium cost. It’s crucial to balance sufficient coverage with manageable premiums.
Benefits of Income Protection Insurance
Continued Income Stream: Provides financial security by replacing a significant portion of your income during periods of illness or injury.
Flexibility in Use: The payouts are flexible and can be used to manage daily expenses, medical costs, or any financial obligations, giving you broad financial support.
Peace of Mind: Ensures that you won’t face financial distress during your recovery, allowing you to focus solely on getting better.
Importance of Income Protection Insurance for New Zealanders
Complements ACC Coverage: While the Accident Compensation Corporation (ACC) provides some support for accidental injuries, income protection covers a broader range of scenarios, including illnesses, which are not covered by ACC.
Tailored to Your Needs: With various policy options available, you can tailor coverage to fit your specific professional and personal circumstances.
Key Considerations When Choosing Income Protection Insurance
Assessment of Needs: Evaluate how much of your regular income you need to maintain your lifestyle. This will guide you in choosing the right coverage amount.
Health and Occupation Risks: Consider your health status and occupational risks, as these can influence premium costs and policy terms.
Provider Reputation: Opt for an insurance provider well-regarded for its customer service and claims handling, ensuring a smoother process if you need to use the policy.
Case Studies
Freelancer: Emily, a freelance web developer in Wellington, opts for income protection insurance with a one-month deferred period, covering up to 75% of her usual earnings until retirement age. This policy ensures her income flow despite the unstable nature of freelance work.
Corporate Manager: David, working in Auckland, secures an income protection policy that provides 70% of his income during periods he cannot work. This policy includes a 90-day waiting period, balancing lower premiums with reasonable coverage onset.
Healthcare Worker: Anita, a nurse in Christchurch, faces daily risks of injury and illness. She chooses a policy with a six-month waiting period, providing long-term security until she retires, complementing the support she might receive from ACC for any accidental injuries.
Considerations for Choosing the Wait Period
Emergency Savings
Assessment: Evaluate how much emergency savings you have. A larger savings buffer may allow you to opt for a longer wait period, which can reduce your premiums.
Recommendation: If you have sufficient savings to cover expenses for several months, consider a longer waiting period to decrease the cost of the insurance.
Liquidity of Assets
Assessment: Consider how quickly you can liquidate other assets if needed. Investments or additional funds that can be accessed relatively quickly can influence your decision on the waiting period.
Recommendation: If you have readily accessible assets, you might be more comfortable with a longer wait period.
Existing Coverages
Assessment: Review any other insurance policies or employee benefits you have that could cover some expenses during the initial period of disability.
Recommendation: If you have short-term disability cover or other benefits, you might choose a longer deferred period for your income protection to align with when those benefits cease.
Considerations for Choosing the Payment Term
Retirement Plans
Assessment: Consider your age and when you plan to retire. This will help determine how long you might need the coverage.
Recommendation: If you are closer to retirement age, a shorter payment term may be sufficient. Younger individuals should consider longer terms to ensure coverage during their working years.
Nature of Your Occupation
Assessment: Reflect on the risks associated with your profession. Some jobs may have higher risks of long-term disabilities than others.
Recommendation: If your occupation is high-risk, consider opting for a longer benefit period to provide greater financial security.
Family and Financial Responsibilities
Assessment: Evaluate your family’s financial needs and your role as a provider.
Recommendation: If you have significant family and financial obligations, a longer payment term will ensure continuous support in case of long-term disability.
Policy Cost vs. Benefit
Assessment: Balance the cost of the policy against the potential benefit you might receive. Longer payment terms generally result in higher premiums.
Recommendation: Weigh the increased cost against the potential need for long-term financial support to decide if the additional expense is justified.
These considerations are crucial in tailoring an income protection insurance policy to fit your unique circumstances, providing optimal coverage while managing costs effectively. This approach ensures that you have a comprehensive understanding of how to best protect your income, considering the financial and personal aspects of your life in New Zealand.
Summary
Income protection insurance is an essential safeguard for anyone reliant on their income in New Zealand. It offers substantial financial support, allowing you and your family to maintain your lifestyle without economic hardship during periods of health-related work absences.
