What is income protection?

Income protection insurance pays you a regular monthly benefit if you can't work because of illness or injury. It replaces a portion of your income so you can keep covering the essentials — rent or mortgage, groceries, bills — while you focus on recovering.

For most Kiwis, their income is their most valuable financial asset. Yet it's often the last thing people think to protect. This article explains how income protection works, what you can expect to receive if you need to claim, and what to consider when choosing your cover.

In This Article

• How does income protection work?
• What is a wait period?
• What is a benefit period?
• How much will I receive if I need to claim?
• Are income protection payments taxed?
• What's covered?
• Common exclusions
• ACC and income protection — how do they interact?
• Keeping your cover up to date
• Income protection if you're self-employed
• Frequently asked questions
• Glossary

How does income protection work?

When you take out income protection cover, you choose how much of your income to insure. Most insurers allow you to cover up to 75% of your pre-disability income. That percentage forms the basis of your monthly benefit — the amount you'd receive each month while you're unable to work.

The two key decisions you make when setting up your policy are your wait period and your benefit period. Together, these determine when your payments start and how long they continue.

Income protection covers both illness and injury — so whether you're recovering from surgery, dealing with a mental health condition, or managing a chronic illness that stops you working, your policy is designed to kick in once you've satisfied the wait period.

What is a wait period?

A wait period (sometimes called a waiting period or elimination period) is the amount of time between making a claim and when your insurer starts paying you. Typical wait periods range from four weeks to 13 weeks, though some policies offer shorter options.

Choosing a longer wait period generally means lower premiums, because you're accepting more of the risk yourself. A shorter wait period means payments start sooner, but your premiums will usually be higher.

Many people factor in things like sick leave entitlements, annual leave balances, or savings when deciding on their wait period. If you have several weeks of paid leave available, a longer wait period may make sense. If your financial buffer is limited, a shorter wait could give you more peace of mind. You can read more in our article on what is an income protection waiting period.

What is a benefit period?

Your benefit period is how long your insurer will continue paying you once you've satisfied the wait period. Common options include:

• Two years — a shorter benefit period, often with lower premiums
• Five years — a medium-term option
• To age 65 (or retirement) — the longest option, providing cover for the full duration of your working life if needed

Payments continue for the duration of your chosen benefit period, or until you return to work — whichever comes first. If you recover and go back to work before the benefit period ends, your payments stop at that point. You can read more about this in our article on how long income protection pays you.

Choosing between a two-year and a to-age-65 benefit period is one of the more significant decisions when setting up a policy. A longer benefit period provides much greater protection against long-term conditions, but comes at a higher premium cost. What's right depends on your circumstances, budget, and existing financial resilience.

How much will I receive if I need to claim?

You'll receive up to 75% of your pre-disability income — that is, the income you were earning before you became unable to work. This is typically calculated as your income over any consecutive 12-month period in the last three years before disablement.

Importantly, your claim payments can't exceed the amount you've insured. Here's a practical example:

Say your income is $60,000 per year. You insure 75% of that — which works out to $3,750 per month. If your income later rises to $80,000 but you haven't updated your cover, you'd still receive $3,750 per month, because that's what you insured. This is why reviewing your cover amount regularly matters.

It's also worth knowing that most income protection policies are indemnity-based — meaning your benefit at claim time is assessed against your actual income at that time, up to the insured amount. Some policies offer an agreed value option, where the benefit amount is locked in at the time you take out the policy regardless of future income changes.

To understand how much of your income can be covered, our article on how much of your income you can cover with insurance goes into more detail.

Are income protection payments taxed?

Yes — income protection claim payments are treated as income by the IRD and are taxable. This is the case regardless of how you receive them.

On the flip side, your income protection premiums are generally tax-deductible in New Zealand. This can partially offset the cost of your premiums, though what applies to your specific situation may depend on how your policy is structured — so it's worth checking with your accountant or tax adviser.

What's covered?

Income protection covers you for any illness or injury that leaves you unable to work. That includes:

• Physical conditions — broken bones, surgery recovery, chronic illness, cancer
• Mental health conditions — depression, anxiety, burnout, stress-related illness
• Cardiac events — heart attacks, heart surgery recovery
• Neurological conditions — strokes, multiple sclerosis
• Any other condition that meets your policy's definition of disability

The key question is whether you're unable to work in your own occupation or in any occupation. Policies differ here, and it matters. An own occupation definition means you're covered if you can't perform the specific duties of your job — even if you could theoretically do some other kind of work. An any occupation definition is more restrictive — it only covers you if you can't work in any occupation at all.

Most comprehensive income protection policies in New Zealand use an own occupation definition, at least for an initial period. Always check the policy wording.

Common exclusions

Income protection policies have exclusions — situations where a claim won't be paid. While the specifics vary between insurers, common exclusions include:

• Self-inflicted injuries
• Pre-existing conditions (unless disclosed and accepted at the time of application)
• Normal pregnancy and childbirth (complications may be covered)
• Intentional criminal acts
• Conditions arising from war or civil unrest

If you have a pre-existing condition, it's important to disclose it fully when applying. Insurers may accept it with no exclusion, add a specific exclusion, or load your premium. Non-disclosure can lead to a declined claim later. Our article on applying for new cover covers the importance of disclosure in more detail.

ACC and income protection — how do they interact?

ACC (Accident Compensation Corporation) provides cover for injuries caused by accidents in New Zealand. If you're injured in an accident, ACC will cover a portion of your lost income — currently up to 80% of your pre-accident earnings, up to a cap.

However, ACC doesn't cover illness. If you're unable to work due to a health condition — heart disease, cancer, a mental health diagnosis — ACC won't pay out. This is a significant gap in protection for many Kiwis.

Because of this, income protection is often described as the illness equivalent of ACC. It's also worth noting that most income protection policies are structured to work alongside ACC rather than duplicate it — your insurer may offset the benefit by the ACC payments you receive, so you don't receive more than 75% of your pre-disability income in total.

We cover this in more detail in our article on why you'd get income protection when we have ACC.

Keeping your cover up to date

It's important to review your income protection cover regularly — ideally once a year, or whenever your income changes significantly. Because your benefit is calculated based on the amount you've insured, a policy taken out when you were earning $50,000 won't automatically adjust if your income climbs to $80,000 or $100,000.

If you've received a pay rise, changed jobs, or moved into a higher income bracket, it's worth checking whether your cover still reflects your actual earnings. Similarly, if your income has decreased (for example, if you've moved to part-time work), you might consider whether a lower sum insured and reduced premium makes sense.

Our article on when and why to review your cover has more guidance on this.

Income protection if you're self-employed

Income protection is arguably even more important for self-employed Kiwis than for those in salaried roles. If you're employed, you may have sick leave entitlements to fall back on. If you run your own business or work as a contractor, there's often no safety net at all — if you can't work, income stops.

Calculating pre-disability income for self-employed people can be more complex, as income may vary year to year. Insurers typically look at your income over the past one to three years and may use an average. It's worth being prepared with financials and understanding how your insurer will assess your income at claim time.

Read more in our article on income protection for self-employed people.

Frequently asked questions

What is income protection insurance?

Income protection insurance pays you a monthly benefit if you're unable to work due to illness or injury. It replaces a portion of your income — typically up to 75% — so you can continue meeting your financial obligations while you recover.

How much of my income can I insure?

Most New Zealand insurers allow you to insure up to 75% of your pre-disability income. You choose the percentage when you take out the policy, and your monthly benefit is based on that amount. You can read more in our article on how much of your income you can cover.

What is a wait period in income protection?

A wait period is the time you wait from making a claim before your insurer starts paying you. Common wait periods in New Zealand range from four weeks to 13 weeks. A longer wait period typically means lower premiums. See our full article on wait periods in income protection.

What is a benefit period?

Your benefit period is how long your insurer will keep paying you once the wait period is over. Options typically include two years, five years, or to age 65. Payments stop when your benefit period ends or when you return to work — whichever happens first.

Is income protection taxable?

Yes. Income protection payments are treated as taxable income by the IRD. However, your premiums are generally tax-deductible, which can partially offset your costs.

Does income protection cover mental health conditions?

Yes, most income protection policies cover mental health conditions such as depression, anxiety, and stress-related illness, provided they're not pre-existing conditions that were excluded at the time of application. If a mental health condition keeps you unable to work and satisfies your policy's definition of disability, it's generally covered.

Does income protection cover self-employed people?

Yes — self-employed Kiwis can take out income protection. Calculating the benefit may be slightly more complex, as insurers typically assess income over the past one to three years. Read more about income protection for the self-employed.

What's the difference between own occupation and any occupation cover?

An own occupation definition pays out if you're unable to perform the duties of your specific job. An any occupation definition only pays out if you can't work in any capacity at all. Own occupation is generally considered the more comprehensive option, and is what most comprehensive income protection policies in New Zealand offer, at least in the early years of a claim.

Does income protection cover ACC situations?

If an accident is covered by ACC, your income protection policy may offset the benefit — meaning your total income replacement (from ACC plus your insurer) won't exceed 75% of your pre-disability income. Income protection primarily fills the gap for illness, which ACC doesn't cover. Read more in why get income protection when we have ACC.

What happens if my income changes after I take out a policy?

Your insured amount stays fixed unless you update it. If your income increases and you don't adjust your cover, your benefit at claim time will still be based on the amount you originally insured. It's important to review your policy whenever your income changes significantly.

What does income protection not cover?

Common exclusions include self-inflicted injuries, pre-existing conditions that were disclosed and excluded at application, normal pregnancy, and certain criminal acts. Each policy is different, so it's worth reviewing the specific exclusions in your policy wording.

Do I need income protection if I have savings?

Savings can help cover short-term disruptions, but an extended period out of work — particularly if you're dealing with a serious illness — can deplete even substantial savings quickly. Many people use savings to cover the wait period and rely on income protection for longer-term cover. Our article on income protection if you have savings or sick leave explores this further.

How do I choose a wait period?

It depends on your financial situation. If you have savings, sick leave, or other income that can cover an initial period off work, a longer wait period may be appropriate — and will reduce your premiums. If your financial buffer is limited, a shorter wait period gives you faster access to payments.

Can I increase my income protection cover later?

Yes, in most cases you can increase your cover if your income rises — though insurers may require updated health information if you're applying for a higher sum insured. Some policies include automatic indexation or future insurability options that allow increases without further underwriting.

Why is income protection important?

Your ability to earn an income is the foundation of your financial life — it's what funds your mortgage, rent, groceries, savings, and everything else. Your income is one of your most valuable assets, and income protection exists to safeguard it against the risk of illness or injury.

Glossary

Term	What it means
Income protection insurance	A policy that pays a monthly benefit if you're unable to work due to illness or injury, replacing a portion of your lost income.
Pre-disability income	The income you were earning before you became unable to work. Typically calculated as your income over any consecutive 12-month period in the last three years before disablement.
Wait period	The time between making a claim and when your insurer starts paying you. Also called a waiting period or elimination period.
Benefit period	How long your insurer will continue paying your monthly benefit once the wait period is over. Options typically include two years, five years, or to age 65.
Monthly benefit	The amount your insurer pays you each month while you're on a valid claim.
Own occupation definition	A policy definition that pays out if you're unable to perform the specific duties of your own job, even if you could do other types of work.
Any occupation definition	A more restrictive policy definition that only pays out if you're unable to work in any occupation at all.
Indemnity-based policy	A policy where your benefit at claim time is based on your actual income at that point (up to the insured amount), rather than a fixed figure set at application.
Agreed value policy	A policy where the monthly benefit is locked in at the time of application, regardless of what your income is at the time of a claim.
Exclusion	A condition or circumstance that is specifically not covered by your policy. Common exclusions include pre-existing conditions and self-inflicted injuries.
Pre-existing condition	A health condition you had before taking out your insurance policy. Insurers may exclude it from cover or accept it with a premium loading.
ACC	Accident Compensation Corporation — the New Zealand government scheme that provides income compensation for injuries caused by accidents. Does not cover illness.
Premium	The regular payment you make to keep your insurance policy active.
Underwriting	The process an insurer uses to assess your health, lifestyle, and risk factors before deciding whether to offer you cover and on what terms.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.