Along with your health, your ability to earn an income is probably the most important asset you have. What would happen if a serious illness or accident stopped you from working for a month, a year, or even longer? How long would your money last if you were unable to work, and who would this affect? That is where Income Protection insurance can help.
There are a range of income protection insurance policy types in New Zealand, and the major types are -
Indemnity- The benefit is calculated as a proportion of your income at the time you make a claim. An indemnity income protection insurance policy pays the lesser of the monthly insured benefit or 75% of the best 12 consecutive months income from the previous three years (this depends on the policy). An important point is that the payment under this option is taxable, but the premiums are usually deductible.
Agreed value - An "agreed" level of cover is set at the time the income protection insurance policy is set up - and this is the amount paid by the insurance company, regardless of your earnings at the time of the claim. The maximum amount you can insure is usually set at 55% of your gross income, and whilst the premiums are not deductible, the payment is tax-free in your hands.
Loss of Earnings - This type of income protection insurance policy is similar in many ways to an Indemnity policy - however the benefit is based on your actual income shortfall. Loss of Earnings (LOE) will look at your actual drop in income, and will then pay you 75% of this drop. In many cases this type of policy will pay more (so it’s often more expensive). Again, the payment under this option is taxable, and the premiums are deductible.
Which of these income protection insurance policy types is best for you depends on your individual situation. The choice will depend on a range of things, but the most important is the predictability (or stability) of your income.
An Indemnity income protection policy is often a good solution if your income is going to remain stable – because with this type of policy your actual income at the time you go on claim is very important. This type of plan is usually price competitive and is often the type chosen by employees.
For people who have an unpredictable and fluctuating income (e.g. self-employed, contractors, etc) who need greater certainty at time of claim (especially where repeat claims are made), are best to consider an Agreed Value income protection policy or a Loss of Earnings policy.
Save yourself time and money!
Not sure? Use our calculator.
* A non-smoker is someone who has not smoked any tobacco product in the last 12 months.Get Quote Now!
SHARE advisers offer specialist advice in life and trauma insurance, income protection, health insurance, and business and ACC insurance.
Talk to a SHARE adviser about planning for your retirement, your current investment options, or helping to get the best out of your KiwiSaver account.
What are my mortgage requirements, how do they work? And how do I safeguard my home with mortgage protection insurance?