Income Protection basics

What Is Income Protection?

If you're like most people, your ability to earn an income is probably your greatest asset. Income protection enables you to protect this asset by insuring a percentage of your income.

How does it work?

You choose a percentage of your income to protect (up to 75%), a "Wait Period", and a "Payment Period". If you become ill and can't work, once your Wait Period has finished, the insurer will make monthly claim payments to you. These continue until you're able to return to work or until the end of your Payment Period, whichever is first.

How much will I receive if I need to claim?

You'll receive up to 75% of your "pre-disability income" (which is the income you were earning just before you became disabled). It's pretty simple, however there are three things to keep in mind.

  • Your claim payments are based on your "pre-disability income". Typically, pre-disability income means your income over any consecutive 12 month period in the last 3 years before disablement.
  • Your claim payments can't be more than the amount you have insured. Let's say your income is $50,000 right now. You can insure up to 75% of this (which is $3,125 a month). Even if your income at the time you are disabled has increased, say to $75,000, you would still receive only $3,125, as this is what you had insured.
  • The claim payments that you receive are taxed as income by the IRD (on the flipside, your premiums are tax deductible).

It's important to check your cover amount regularly and increase or decrease it with changes in your income.

What's covered

Insurers have some exclusions (for example self-inflicted injuries), but aside from these, any health issue that keeps you off work is covered.

What's not covered?

Income protection covers you if you can't work for health reasons. You can add cover for redundancy with some insurers, however this is not part of standard income protection.

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