Finding out your new employer offers free life insurance or income protection is a great feeling. It's a genuine perk that can save you thousands of dollars in premiums. But for many New Zealanders, this employee benefit creates a false sense of security that can be dangerous if left unexamined.
Group insurance (coverage provided by your employer to all staff) is excellent as a base layer of protection. However, it is rarely designed to be your *only* layer. Understanding the gap between what your boss pays for and what your family actually needs is critical to building a safety net that won't disappear when you change jobs. If your employer is reviewing staff benefits, EmployeeLab is a good company to talk to about employee benefits.
What You Usually Get (And What You Don't)
Most group schemes in New Zealand follow a standard formula. While generous, they are cookie-cutter policies designed to cover the average employee, not your specific life.
- •Life Insurance: Typically pays a lump sum of 2x or 3x your annual salary. If you earn $80,000, your family gets $160,000 to $240,000.
- •*The Gap:* If you have a $600,000 mortgage and two young children to support for the next 15 years, $240,000 will not last long.
- •Income Protection: Usually pays 75% of your salary for a maximum of 2 years or 5 years.
- •*The Gap:* If you suffer a permanent disability at age 40 (like a severe stroke or back injury) and can never work again, a 2-year benefit leaves you financially exposed from age 42 to 65. Most personal policies, by comparison, can pay out until retirement age.
The Portability Trap
The biggest risk with group cover is that it is tied to your employment. In the insurance industry, we call these benefits golden handcuffs: they are great while you are wearing them, but you lose them the moment you leave the building.
If you resign, are made redundant, or your company restructures, your cover stops. This leaves you effectively uninsured overnight.
The Continuation Option: Your Escape Route
Most group schemes include a continuation option. This clause allows you to convert your group cover into a personal retail policy without answering medical questions, provided you apply within a strict window (usually 30 to 60 days after leaving).
This is a vital lifeline if your health has deteriorated. If you developed diabetes or a back condition while employed, you can keep your cover for those conditions. However, be aware that you will start paying the premiums yourself, and they will likely be significantly higher than the group rates your employer was paying.
Tax Implications: Is the Payout Yours?
Tax on insurance can be complex, but for employees, the rules are generally consistent.
- •Life and Trauma Payouts: These are typically tax-free. If you die, the lump sum paid to your estate or family is not taxed as income.
- •Income Protection Payouts: These are treated as taxable income. If your group income protection pays you $1,500 a week while you are off work, the IRD treats that money just like salary. You will pay PAYE tax on it.
*Note: You generally cannot claim a tax deduction for the premiums on group insurance because your employer is paying them.*
How to Top Up Without Overpaying
You don't need to double up on insurance. Instead, you can build a personal portfolio that wraps around your work benefits. This strategy saves money while keeping you secure.
The Danger of Complacency
The most dangerous aspect of group insurance is simply ticking the mental box that says you are sorted.
We often see clients who had minor health issues (high blood pressure, high cholesterol) develop while they were covered by a group scheme. Because they felt covered, they never applied for personal insurance. When they eventually left that job, they found they could no longer get affordable cover because of those now-existing conditions.
The best strategy? Secure a base level of personal insurance while you are healthy and employable. Treat your work scheme as a fantastic bonus, but never as your only safety net.
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