For most people, the ability to work and earn an income is the main way of supporting themselves and their family. In New Zealand, if you have an accident ACC will probably cover your loss of earnings. However, ACC doesn’t cover illness. This means if you were physically unable to work due to illness you may struggle to pay your bills, living costs and mortgage/rent without a large amount of savings on hand.
AdviceFirst adviser Stefan Rodrigues says in these situations Income Protection can provide a huge relief as it typically pays out at a maximum of 75% of pre-disability income.
“If an illness prevents you from working, you’ll want to know your finances and family are taken care of so you can focus on recovery and getting back to work,” says Stefan.
While Income Protection is ideal for the breadwinners of the household, Stefan says there are some things you should consider when looking at taking out cover, such as the type of policy.
There are four main types of policy that people can choose from:
- Agreed Value is based on a proportion of your income at the time of your application. It typically is non-taxable at claim time and gives people certainty.
- Indemnity Cover pays a benefit based on your income at claim time and you typically have to pay tax while you are being covered by your claim.
- Loss of earnings allows you to have the best of both agreed value and indemnity, and suits people that are self-employed or whose earnings fluctuate year on year.
- Mortgage and Rent Cover pays based either on a percentage of your salary or your mortgage payments whichever is higher. “The benefit of this type of cover is that this isn’t offset by ACC income. For example, if you were on an ACC claim, you would receive the ACC payment plus the mortgage cover,” says Stefan.
Other things to look out for when researching policies are the waiting period and payment term of the policy.
“The waiting period is the time from when you are ill to the time the monthly payments are made. The standard options are a four week, eight week or 13 week wait, which translates to a one month, two month or three month waiting period,” says Stefan.
“The payment term is how long the monthly payments will continue for. The standard options are two years, five years or to age 65. The payment of claims will be made as long as you are unable to work or until the end of the payment term, whichever comes first.”
Once you take out a policy you should regularly review it so that it keeps up with changes in your situation such as your age, income level and financial commitments.
If you are interested in finding out more about Income Protection, you can contact an AdviceFirst adviser by calling 0800 438 238 or email firstname.lastname@example.org