Life can throw unexpected challenges at us at any moment, and being prepared for such events is essential, particularly regarding your finances. One type of insurance that New Zealanders often overlook is income protection insurance.
However, with the increasing cost of living and the importance of securing one’s financial future, this type of cover could be crucial for many people. But have you ever wondered, “do I need income protection insurance in New Zealand?” This blog explores the key factors to consider before making your decision.
What Is Income Protection Insurance?
Income protection insurance provides a percentage of your regular income if you cannot work due to illness or injury. In New Zealand, policies typically pay up to 75% of your usual earnings for a specific period, allowing you to cover essential living expenses, such as mortgage repayments, bills, and daily costs, while you recover.
Assess Your Financial Situation
The first and most important factor to consider is your financial situation. Take a moment to evaluate your current income and expenses. Ask yourself the following questions:
- How long could you survive without your income?
You may feel that income protection insurance isn’t necessary if you have significant savings. However, it’s important to remember that many illnesses or injuries can leave you unable to work for extended periods. Would your savings cover several months or even years of expenses?
- Do you have any other sources of income?
If you have a partner who works or receives rental income from an investment property, you might be less reliant on your income. However, if you’re the primary or sole earner, losing your income could have a much more significant impact on your household.
Your Employment Type and Job Security
Your profession plays a large role in determining whether income protection insurance is a good idea. If you work in a high-risk industry such as construction or manual labor, the likelihood of injury or illness could be higher, making this type of cover more critical.
Additionally, if your job is based on commission, contract work, or self-employment, you may have less job security than salaried employees. Self-employed workers, in particular, often don’t have access to employer-provided sick leave, making income protection insurance an important safeguard.
Your Current Health Status
Your health also impacts your need for income protection insurance. If you’re young and healthy, it’s easy to believe that you’ll never face a serious illness or injury. However, unforeseen events can affect anyone at any time. Even common issues like stress, anxiety, or back pain can leave people unable to work for months. It’s worth considering how you would cope financially if you suddenly could not earn an income due to health problems.
Remember that the cost of income protection insurance can increase with age or if you have pre-existing conditions. Therefore, securing a policy earlier in life may save you money in the long run.
Government Benefits and ACC
New Zealand’s Accident Compensation Corporation (ACC) covers work-related injuries. However, there are limitations to ACC that you need to be aware of:
- ACC only covers injuries, not illnesses.
If you suffer from a medical condition like cancer, heart disease, or a mental health issue, ACC will not provide compensation. This leaves a gap in your coverage that income protection insurance can fill.
- ACC may not cover non-work-related injuries.
If you are injured outside of work, ACC might not provide full compensation. For example, an injury sustained during a weekend sports game may result in a lower payout than a workplace injury. Income protection insurance ensures you receive consistent financial support, regardless of where or how you were injured.
Affordability and Policy Costs
The cost of income protection insurance can vary widely depending on age, profession, and health. While adding another expense to your monthly budget may be daunting, it is important to weigh the potential cost of being without an income for an extended period.
In some cases, premiums can be tax-deductible. If your income protection insurance is set up correctly, the premium costs may be claimed as a tax deduction, depending on your circumstances.
Flexibility and Customisation
Many income protection insurance policies in New Zealand offer flexibility regarding coverage options. For instance, you can choose the length of the waiting period (when you become unable to work and when your payments begin), and the benefit period (how long you will receive payments). Customising these aspects of your policy can help reduce costs while providing adequate protection.
Peace of Mind
One of the most compelling reasons to consider income protection insurance is the peace of mind it offers. Knowing that you have a financial safety net if something goes wrong can relieve significant stress, allowing you to focus on recovery without worrying about how you’ll pay the bills.
Final Thoughts
Whether you need income protection insurance in New Zealand depends on your circumstances, including your financial stability, employment type, health, and the level of risk in your job. For those without significant savings or alternative sources of income, this type of insurance can be a lifeline in times of hardship.
If you’re unsure about your specific needs, speaking to a financial adviser who can assess your situation and recommend the right level of cover for you may be helpful. Considering the factors discussed here, you’ll be better equipped to decide whether income protection insurance is worth it.
