Who is income protection for?

Income protection insurance is a powerful cover. If an illness or injury puts you off work, income protection can pay a regular monthly replacement income – subject to your policy’s terms – to support your lifestyle while you recover.

It’s relevant to anyone whose earnings cover their regular costs, and it can be especially worth considering if you have a mortgage, dependants or both.

That said, one size doesn’t fit all. Whether you need it and how much depends on your unique circumstances. Here’s what’s worth thinking about.

How income protection works

Every policy is different, so the policy document is worth reading closely. A few things to know upfront:

• It doesn’t replace all of your income. You can choose how much to cover, up to a limit set by the insurer, usually around 75% of your pre-tax income. 
• It doesn’t pay from day one. Payments start after an agreed waiting period. You choose the one that suits you from a list of options (more on that below).  
• It lasts for the period you choose. That’s called the benefit period. Depending on the insurer, it can range from a couple of years to age 65 or 70.
• Definitions matter. Policies differ on what counts as being "unable to work".

What other support could you lean on?

Before you decide how much cover you want, look at what’s already in your corner.

• Sick leave – Under the current law, eligible employees get at least 10 days a year after six months in the job, and unused days can build up to 20(1). That includes part-timers for now, but it’s changing. From August 2028, employees will earn sick leave in hours, in proportion to the hours they work, so part-timers will earn less(2). Either way, sick leave can help with short spells, not months off work. 
• ACC – It’s designed to cover accidental injuries but, unlike income protection insurance, it usually doesn’t cover illnesses. If an accident stops you working, ACC weekly compensation can pay up to 80% of your earnings, up to a weekly maximum, usually from around day eight.(3)
• Your own safety nets – Savings, investments you could draw on, a partner’s income, family who could step in. Other insurance may help too. Health insurance can help cover the cost of treatment, and trauma cover can pay a lump sum if you’re diagnosed with a specified serious illness. Neither replaces your regular income the way income protection does, but they can ease the pressure.

One more thing to know: if you receive money from somewhere else while you’re off work, your insurer may take it off what they pay you. Exactly how this works depends on the policy, so it’s important to check the terms and conditions. For example, if you’re hurt in an accident and ACC starts paying you, that offsets your monthly income protection benefit. 

The idea is that your total stays in line with what you’d normally earn.

What expenses do you have?

If you couldn’t work, what bills would keep arriving? Probably the mortgage or rent, council rates if you own your home, power, groceries, phone and internet, insurance premiums, personal loan or credit card payments, and school costs.

Some of these you could trim, like streaming, holidays and takeaways. Others you couldn’t. And don’t forget the costs that don’t show up every month: car registration and repairs, home maintenance, doctor and vet bills, and more.

Add up those essentials, then subtract any income that would keep coming in, like a partner’s pay. The difference is a rough starting point for how much income protection you may need.

What are you trying to protect?

Think about the lifestyle and financial goals you’d want to maintain if you couldn’t work. For example, if you’re saving for a house deposit, you may want more cover so an illness doesn’t wipe out those savings.

It also comes down to your comfort with financial risk. Some people are comfortable adjusting their lifestyle to a lower income, while others may prefer more breathing room in the budget so they can avoid dipping into savings. Neither is wrong.

When should payments start and stop?

Two important choices shape both your cover and your premium. 

• The waiting period is the time between you stopping work and payments starting. It varies by insurer, from a couple of weeks to a few months or more. A longer wait (all else being equal) can mean a lower premium, but you’d need to cover the gap yourself from sick leave, savings or other support.
• The benefit period is how long payments can continue. Depending on the insurer, you can choose from a couple of years to age 65 or 70. All else being equal, longer cover usually means higher premiums.

Will your health and lifestyle affect your cover?

They might, both in whether you can get cover and what it costs. Insurers look at things like:

• Your current health and medical history
• Your occupation, especially if it’s high-risk
• Whether you smoke
• Risky hobbies.

If you already have a medical condition, that doesn’t automatically rule out cover. Depending on what it is, an insurer may offer cover on different terms, like exclusions or a higher premium. 

Whatever your situation, be upfront when applying. Missing or inaccurate details can affect a claim down the track.

Does it fit with what you already have?

Income protection insurance works alongside other cover. It’s worth looking at what you already have in place, like life, trauma, health or mortgage protection insurance, so you can spot overlaps and gaps. 

And it’s not a set-and-forget decision. A pay rise, a bigger mortgage or a new baby can all change how much cover makes sense.

Working it out together

Would you like to work through these questions for your own situation? One of our Insurance Link advisers can help you look at your options with confidence. 

Find an Insurance Link adviser near you. 

Sources: 

1. Employment New Zealand – Sick leave entitlements
2. MBIE – Holidays Act reform: Employment Leave Act
3. ACC – Weekly compensation

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 financial advice.

A full disclosure statement for each Insurance Link Adviser is available on request and free of charge.