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What is income protection insurance?
Income protection insurance — also called income insurance or disability income insurance — pays you a regular monthly benefit if you're unable to work due to illness or injury. The benefit is typically 75% of your pre-disability income, designed to cover your essential living costs while you recover.
Unlike life insurance, which pays a one-off lump sum if you die, or health insurance, which covers your medical bills, income protection replaces your actual lost earnings. It's the insurance that keeps the lights on, the mortgage paid, and food on the table when you can't work.
Payments continue until you recover, reach the end of the benefit period you've chosen (which could be 2 years, 5 years, or all the way to age 65), or until the policy's end age — usually 65.
💡 Good to know
Think about it this way: if you earn $80,000 a year and work until 65, your total lifetime earnings could be over $2 million. That earning power is your biggest asset — income protection insures it.
What does ACC cover — and what doesn't it?
This is the most important distinction for Kiwis to understand. ACC is a fantastic system, but it has a massive gap that most people don't realise until it's too late.
What ACC covers
If you can't work because of an accident — a workplace injury, a sports injury, a car accident, a fall — ACC will pay you 80% of your income after a one-week stand-down period. This is comprehensive and applies to all New Zealanders regardless of employment status.
What ACC does NOT cover
ACC does not cover inability to work due to illness. This includes:
- Cancer and cancer treatment
- Heart disease and stroke
- Mental health conditions — depression, anxiety, burnout
- Back problems from degeneration (not accident-caused)
- Chronic fatigue, fibromyalgia, autoimmune conditions
- Pregnancy complications
- Any degenerative condition
⚡ Key point
In New Zealand, illness is a far more common cause of long-term inability to work than accidents. Yet ACC only covers accidents. Income protection insurance fills this massive gap — it's the only way to protect your income if illness stops you from working.
Who needs income protection?
If your household depends on your income — which is most working Kiwis — income protection is worth serious consideration. It's particularly important for:
- Self-employed people — You have no employer sick leave to fall back on. If you can't work, your income stops immediately.
- Sole earners — If you're the only income in your household, losing that income would be devastating.
- Anyone with a mortgage — The bank doesn't care if you're sick. Your mortgage payments are due regardless.
- Anyone without significant savings — Could you cover 3 to 6 months of expenses without income? Most Kiwis can't.
- Tradespeople and physical workers — If your job requires physical ability and you develop a condition that prevents physical work, your entire income is at risk.
💡 Good to know
Ask yourself: if I couldn't work for 6 months starting tomorrow, could my family maintain our lifestyle? If the answer is no, income protection deserves a place in your insurance plan.
Income protection may be less critical if you have substantial passive income (rental properties, investments), significant savings that could cover a year or more of expenses, or your partner's income alone comfortably covers all household costs.
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How do policies work?
Income protection policies have several key variables that you choose when setting up your cover. Understanding these helps you balance cost against protection:
1. Benefit amount
Usually 75% of your gross income. After tax, this is often close to your normal take-home pay. Insurers cap the benefit at 75% to ensure you have an incentive to return to work when you're able.
2. Waiting period
This is how long after you stop working before benefit payments begin. Common options:
- 2 weeks — Payments start quickly, highest premiums
- 4 weeks — A common choice, balancing cost and protection
- 8 weeks — Lower premiums, but you need savings or sick leave to cover the gap
- 13 weeks — Significantly cheaper, best for those with good savings or employer sick leave
💡 Good to know
If you're employed with sick leave, match your waiting period to your sick leave entitlement. If you have 4 weeks of sick leave, a 4-week waiting period means your income is covered from day one — employer pays the first 4 weeks, then the insurer takes over.
3. Benefit period
How long payments continue if you remain unable to work:
- 2 years — Cheapest option, covers most recoverable conditions
- 5 years — Middle ground, good value
- To age 65 — Most comprehensive, protects you if you're permanently unable to return to your previous work capacity
4. Definition of disability
This determines when the insurer considers you "unable to work":
- "Own occupation" — You can't perform your specific job. A surgeon who loses fine motor skills would qualify even if they could do other work. This is the better definition for most people.
- "Any occupation" — You can't perform any job you're reasonably suited to by education and experience. Harder to claim on, but cheaper.
⚡ Key point
The "own occupation" definition is more expensive but significantly more valuable. If you're a builder who develops severe arthritis and can't do physical work, "own occupation" cover pays out. "Any occupation" might argue you could work a desk job instead. Always check which definition your policy uses.
How much does it cost?
Income protection is one of the more expensive personal insurance products, because the risk of needing to claim is relatively high compared to life insurance. Here are realistic New Zealand ranges:
For a healthy 35-year-old earning $80,000/year, income protection covering 75% of income with a 4-week wait period and benefits to age 65 might cost $80–$150 per month.
The main factors affecting your premium:
- Age — Older means higher premiums
- Occupation — Office workers pay less than tradespeople. High-risk occupations (forestry, mining, fishing) pay the most.
- Income level — Higher income means a higher benefit amount and higher premiums
- Waiting period — Longer wait = lower cost (a 13-week wait can be 40-50% cheaper than a 2-week wait)
- Benefit period — "To age 65" costs more than a 2-year benefit period
- Smoking status — Non-smokers pay significantly less
- Health history — Existing conditions may increase premiums or lead to exclusions
💡 Good to know
For self-employed people, income protection premiums are typically tax-deductible. This is a significant advantage — a $150/month premium effectively costs you less after the tax deduction. Talk to your accountant about claiming this.
Income protection vs other types of cover
It's easy to get confused between the different types of personal insurance. Here's a clear comparison:
- Income protection — Replaces your income with regular monthly payments while you can't work. Covers the ongoing financial impact of being unable to earn.
- Life insurance — Pays a one-off lump sum if you die. Protects your family from the permanent loss of your income.
- Trauma / critical illness — Pays a one-off lump sum if you're diagnosed with a specific serious illness (cancer, heart attack, stroke). Helps cover immediate costs and adjustments.
- Health insurance — Pays for medical treatment costs (surgery, specialist visits, tests). Covers the cost of getting better, but not the income you lose while recovering.
These products solve different problems, and they're not substitutes for each other. Most financial advisers recommend having both income protection and life insurance as the foundation. Health insurance and trauma cover are then added depending on your budget and priorities.
Common questions
What if I can still work part-time?
Most income protection policies offer a partial or proportional benefit if you return to work part-time during your recovery. For example, if you go back to work 3 days a week instead of 5, the policy may pay a proportion of your benefit to make up the difference. This encourages gradual return to work without penalising you financially.
Is the benefit payment taxed?
If you personally own and pay for your income protection policy, the benefit payments are generally tax-free. However, if your employer pays the premiums on your behalf, the benefit payments may be taxable as income. This is an important distinction to understand when setting up your policy.
What about redundancy?
Income protection does not cover job loss or redundancy. It only covers inability to work due to illness or injury. If you're made redundant but are perfectly healthy and able to work, income protection won't pay out. Redundancy insurance is a separate (and much rarer) product.
I'm self-employed — can I get income protection?
Yes, and it's arguably even more important for you than for employees. You don't have employer sick leave to fall back on, so if you can't work, your income stops immediately. Your benefit will typically be based on your average earnings over the last 2 to 3 years, calculated from your tax returns. The premiums are also likely to be tax-deductible — a significant advantage.