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Income Protection
Published by Scott Miller
Income Protection
Income protection in New Zealand is an important financial tool for anyone who earns an income and wants to secure their financial future. It is designed to provide financial security in the event that you are unable to work due to illness or injury. This income is usually a percentage of your pre-disability income and can be used to pay for any expenses such as mortgage payments, bills, medical costs and other costs of living.
You are only able to protect up to 75% of your income with this type of cover, depending on the purpose for this cover, you may want to mix a couple of the products available together to get the best of both worlds. For example, there is some cover where you can only protect 45% of your income or up to 115% of your mortgage or rent payments, this cover is generally not off-set against ACC payments at claim time, should your event be related to an accident. The products that will let you protect up to 75% of your income, are generally offset against ACC or any other income you may receive while you recover. This means, you may receive less than you expected at claim time.
When taking out income protection, it is important to understand the terms and conditions that are associated with the policy. This includes the waiting period and the benefit period, which will determine how long you will receive the income protection payments. It is also important to be aware of any exclusions or restrictions that may be in place. These could be added due to your medical history, or even the type of work you do. If your job is considered high risk, it may be harder to get cover in place.
Indexation:
Indexation ensures that your sum insured keeps up with the rate of inflation so that your family will still be provided for even if the cost-of-living increases. This means that as the cost of living increases, so does the sum insured and so does the premium. We would like to think that over the years our income will increase over time. If you do not have indexation on your income protection, and do not carry out any increases, your cover may not be relevant to your income and your current standard of living.
For example; Let’s say it’s 1993 you are 25 years old. You have set up income protection for $1,721.25 per month, based on 75% $27,540 pa (the average annual salary in 1993). Flash forward 30 years, you are now 55 years old, on a good salary of $80,000 pa, you are diagnosed with an illness that has meant you are unable to return to work - ever. You chose to have no indexation on your Income protection to help keep the cost down and have declined regular reviews with your adviser and made no changes to your sum insured, because life got busy.
You contact your insurer and they approve a claim of $1,721.25 per month as this was your sum insured. You have a mortgage, kids in high-school going off to Uni. You are unable to get access to NZ Super for another 10 years, and your partner is having to stay home to look after you, and has had to leave their job, which was also paying $80,000 pa. You have just lost your total family income of $4,926 per month. There is no ACC and your insurer will pay you $1,721.25 per month. – Will you be ok financially?
What is your strategy to get through the unexpected? Is it time for a chat?
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Watch this space for more information and more deep dives into the world of personal insurance. If you want to know more, get in touch with Sarah and come have a chat. You can also find her on Facebook.