Income protection insurance NZ: How it works

Income protection insurance is designed to pay you a regular amount to replace part of your income if illness or injury stops you working.

In New Zealand, it’s usually paid monthly, and it can cover time off for illness as well as injuries.

The idea isn’t new. Long before modern insurers, members of friendly societies paid into a shared fund that supported them when sickness stopped them earning.

By the late 1980s, New Zealand insurers were offering guaranteed renewable income protection policies covering up to 75% of gross income, and today New Zealanders pay around $539 million a year in income protection premiums.

Yet most people still don’t have it. 

Research from the Financial Services Council found four out of five New Zealanders don’t insure their income against sickness or disability, even though one in seven households had someone unable to work for three months or more because of a serious illness in the past five years.

Instead, many people rely on a mix of other safety nets:

• sick leave, savings
• ACC
• a partner’s income
• or, as a last resort, an early KiwiSaver withdrawal 

Each has limits. Sick leave runs out quickly, ACC only covers accidents, government support for people who can’t work because of a health condition can be reduced or unavailable if your partner earns, and the bar for a KiwiSaver serious illness withdrawal is very high.

That’s why income protection tends to matter most when a household relies on one person’s earnings to cover a mortgage, support dependants or keep a business running.

For professionals whose earnings depend on being able to work, it’s worth considering at every stage of your career, whether you’re employed, self-employed or running your own practice.

Here’s how it works in practice, what shapes the cost, and where PPS Mutual fits.

What is income protection insurance?

Income protection is insurance on your ability to earn. If illness or injury means you can't work at all, or can only work reduced hours (what policies call total or partial disability), it could pay a monthly benefit while you recover.

That keeps money coming in for the mortgage, rent and household bills while you're not earning.

For many professionals, the income you'll earn over the rest of your career is your biggest financial asset. You spent years studying and training to earn it. Income protection is a way to insure it, in the same way you would insure a house or a car.

It's different from life and trauma insurance:

• Life cover is designed to pay a lump sum if you die or are diagnosed with a terminal illness. It can help the people who rely on you with things like the mortgage and living costs.

• Trauma cover is designed to pay a lump sum if you're diagnosed with a specified condition. The conditions it covers are listed in the policy wording.

• Income protection is designed to pay a regular amount, usually monthly, while illness or injury means you can't work, or can only work reduced hours. It keeps money coming in while you recover.

What does income protection insurance cover?

Income protection is designed for time off work because of illness or injury. Depending on the policy, that can include an illness such as cancer or a heart condition, or an injury that keeps you away from work for months.

It doesn't usually cover losing your job. Redundancy cover is a separate type of insurance.

The policy wording on our insurance page sets out exactly how cover works, including what counts as total and partial disability.

It's worth reading the exclusions and conditions with your adviser before you rely on it.

Doesn't ACC cover me if I can't work?

Not unless you're hurt in an accident. ACC covers personal injuries caused by accidents. It doesn't cover illness, sickness or conditions related to ageing. Mental health conditions generally aren't covered either, unless they're linked to an injury ACC already covers.

So if you're off work with cancer, a heart attack or a mental health condition that isn't linked to an injury, ACC generally won't pay. Income protection can cover illness as well as injury.

When ACC does cover an injury, weekly compensation is generally up to 80% of what you earned before the injury, before tax, up to a weekly maximum.

If you're self-employed, ACC works from your earnings after expenses as shown in your tax return, and payments usually start from the eighth day after the injury. It's worth checking what you would actually receive.

How does income protection insurance work?

A PPS accredited adviser helps you make the main decisions when you take out the policy:

• How much it pays. The monthly amount (your sum insured) reduced by any offsets that might apply.

• How long you wait. The waiting period is how long you need to be off work before payments start.

• How long it pays. Payments can run for a set number of years, or up to a set age, for as long as illness or injury keeps you from working fully.

If illness or injury then keeps you from working fully, you make a claim. Your adviser can help you through it. Once your claim is accepted and the waiting period has passed, monthly payments start. 

Agreed value or loss of earnings: what's the difference?

Income protection broadly comes in two styles.

With agreed value cover, the monthly amount is agreed when you take out the policy, based on your income at the time.

With loss of earnings cover, the amount is worked out when you claim, up to your sum insured, based on what you were earning before you stopped work.

With PPS Mutual, that's your best 12 months of earnings from the last three years, which helps if your income goes up and down. Some policies combine the two.

Because agreed value settles the amount up front, it's often looked at by people whose income moves around, such as contractors and practice owners. Which style fits depends on your income. This is where good advice counts, and a PPS accredited adviser can help you set up cover that fits.

How much does income protection insurance cost?

There's no single price. The premium depends on you and on how the policy is set up. Things like these affect it:

• your age and health, and whether you smoke

• how much the policy would pay each month

• how long the waiting period is

• how long payments could last

• whether the cover is agreed value or loss of earnings

As a rule, a shorter waiting period or a longer payment term means a higher premium. An adviser can show you how each choice changes the price, so you can set up cover that fits your budget.

Where does PPS Mutual fit?

PPS Mutual is a life insurer built for professionals. It's a mutual, ultimately owned by the Professional Provident Society Trust for the benefit of its members, and owned and operated in New Zealand.

PPS Mutual's Professionals' Choice Income Protection Cover is designed for professionals and comes in agreed value, loss of earnings and combined versions. As a mutual, PPS allows members to share in its long-term financial success through its Profit Share Benefit.

PPS cover is available through accredited, independent financial advisers. A PPS accredited adviser can also check whether you're eligible.

Frequently asked questions

Can I get income protection if I'm self-employed?

Yes.

Contractors, sole practitioners and business owners can hold income protection. Because self-employed income can change from year to year, the way the cover is set up matters, especially the choice between agreed value and loss of earnings. A PPS accredited adviser can explain the options and what fits your income.

Does income protection cover redundancy?

Not usually. Income protection is designed for when illness or injury stops you working, not for losing your job. Redundancy cover is a separate type of insurance that some insurers offer as an option. If job security is on your mind, ask your adviser what's available.

Is income protection through my employer enough?

It depends on the scheme. Not every employer offers one, including some large firms. Cover through an employer is a good start, but check how much it pays, whether there's a cap, whether it keeps up with what you earn now, how long payments last, whether it covers illness as well as injury, and what happens when you leave. Group cover is part of your employment package, so it usually ends when you change jobs unless there’s an option to continue it. If you own the policy and it covers you, it typically stays with you.

Who can get cover with PPS Mutual?

PPS Mutual's insurance is designed for professionals who meet its eligibility criteria. Cover is also available to their spouses, dependent children and key business associates, subject to eligibility. Membership is exclusively for professionals. The become a member page explains who can join, or a PPS accredited adviser can confirm it for you.

If you'd like to know how income protection could work for you, register your interest and talk to a PPS accredited adviser.

Disclaimer

This article is general information only and is not financial advice. All PPS Mutual cover is subject to the applicable Cover Terms, conditions, exclusions and underwriting. For full details, please refer to the Cover Terms. Information is current as at [date of publication]. PPS Mutual cover is available through accredited, independent financial advisers. Please contact your adviser for further information.