By KiwiCover Insurance Limited

12/26/2014 KiwiCover Insurance says that the financial loss caused by the destruction of a family home typically pales in comparison with the financial effects of the permanent loss of earnings of the home owner.

Yet most Kiwis go without any income protection insurance at all, but very few will let a day go by without having home insurance, the online insurer says.

New Zealand wage and salary earners who have no cover for loss of earnings need to rethink their risk exposures, KiwiCover says. The cost to rebuild an average home in New Zealand is around $380,000, but the loss of future earnings for a person who is unable to work again can range up to several million dollars.

Alan Kelly, Managing Director of KiwiCover Insurance, said that “the risk exposure to loss of earnings tends to be greatest with young families, who have dependants and high liability levels, and who prospectively have 30 working years ahead of them and more. However, permanent loss of earnings for income earners in their late forties and fifties can still be financially devastating. For example, a 50 year old on a salary of $80,000 per year has a potential loss of earnings of $1.2 million before attaining age 65, and there are many people today who work well beyond that age.”

“There has been a lot of media coverage in recent times about the change in house insurance policies from a replacement value basis to a specified sum insured”, Mr Kelly says, “with commentators urging home owners not to leave any gap in coverage. While that is all very well, I would urge all income earners who do not have income protection insurance not to let that chasm in coverage to remain in place for another day. There are many more Kiwis who suffer permanent disability than Kiwis who suffer the loss of their homes, so not only does loss of earnings tend to be a greater risk in terms of amount but it is also a greater risk in terms of probability.”

Income protection insurance typically pays up to 75% of an insured person’s pre-tax earnings if the person is unable to work due to illness. It will also provide a top-up to any ACC benefits payable, to 75% of earnings, if the person is unable to work due to injury. Consequently income protection insurance is designed to ensure that a person receives up to 75% of pre-tax earnings in the event of being unable to work due to disability, irrespective of whether that disability is caused by illness or injury.

Income protection benefits are payable after a period of total disability, whether that disability is temporary or permanent, and they commence after completion of a ‘waiting period’ selected at the time of applying. There is a range of waiting periods available, but the periods most commonly chosen are 4 weeks, 8 weeks and 13 weeks. The longer the waiting period the lower the premium. In addition to premium levels, waiting periods are often selected with reference to sick leave provisions and to the level of cash reserves available to an insured person to meet living expenses after any sick leave runs out.

Income protection benefits are payable for a maximum term which is selected at the time of applying. Maximum benefit payment terms vary, but they are commonly 2 years, 5 years and to age 65. The longer the maximum benefit payment term the higher the premium.

Mr Kelly says that it is not commonly known that premiums paid by an insured person for income protection insurance are tax deductible, if policy benefits are calculated with reference to pre-disability earnings (by far the most common type, and known as ‘indemnity value’). Where premiums are tax deductible the benefits are correspondingly assessable for income tax.

A good income protection policy typically provides a range of other benefits such as a waiver of premium benefit while on claim, partial disability benefits on return to work in a reduced earning capacity, a recurrent disability benefit, a back to work lump sum payment, a vocational retraining benefit and a specialised equipment benefit.


See https://www.kiwicover.co.nz/income-protection-insurance for more details on income protection insurance.