Income protection and life insurance are often confused, but they cover completely different situations. Life insurance pays out when you die. Income protection pays out when you cannot work due to illness or injury. Understanding both helps you build appropriate protection for yourself and your family.
You may need one, both, or neither depending on your circumstances.
The ACC Factor in New Zealand
Before comparing these products, understand that New Zealand's ACC scheme covers all accidents (work and non-work) at 80% of your income. This is unique globally and changes how you should think about insurance. Because ACC covers accidents, income protection in NZ is primarily about protecting against illness-related inability to work. Cancer, heart disease, back problems, and mental health conditions are not covered by ACC. This makes income protection particularly important for the illness gap that ACC does not address.
Life Insurance Basics
Life insurance provides a lump sum payment to your beneficiaries when you die. It protects the people who depend on you financially by replacing the income and support you can no longer provide.
The payout is a single amount, not ongoing payments. Your beneficiaries receive the full sum to use however they need: paying debts, investing for income, or meeting living expenses.
Life insurance only pays out on death. It does not help if you are alive but unable to work.
Income Protection Basics
Income protection replaces a portion of your income if you cannot work due to illness or injury. Unlike life insurance, you are the one who receives the payments because you are still alive.
Payouts are typically 75 percent of your regular income, paid monthly for as long as you remain unable to work, up to policy limits. This continues until you can return to work, reach retirement age, or your policy term ends.
Income protection helps you pay bills and maintain your lifestyle while you recover from illness or injury that prevents you from working.
Why You Might Need Both
Consider a family with a primary earner. If that person dies, life insurance provides a lump sum to replace lost future income and pay debts.
If that same person becomes seriously ill and cannot work for two years, income protection continues paying the bills during that period. Without it, the family would burn through savings and potentially face serious financial difficulty.
These are different risks requiring different solutions. Death is final; disability may be temporary or permanent.
Which Is More Likely
Statistically, you are more likely to have a period of significant illness or disability during your working life than to die before retirement. This makes income protection relevant for many people.
However, the consequences of death are typically more severe and permanent than temporary disability. Life insurance addresses a less likely but more catastrophic outcome.
Both risks are real and both deserve consideration in your protection planning.
Comparing Costs
Income protection typically costs more than life insurance for equivalent coverage levels because claims are more common. Insurers pay out on income protection claims more frequently than life insurance claims.
The benefit period and waiting period you choose significantly affect income protection premiums. Shorter waiting periods and longer benefit periods cost more.
Life insurance premiums depend primarily on your age, health, and amount of cover. Younger, healthier people pay less.
Waiting Periods Explained
Income protection has a waiting period before payments begin. Common options are 30 days, 60 days, or 90 days after becoming unable to work.
During the waiting period, you receive no income protection payments. You need other resources like sick leave, savings, or ACC to cover this period.
Longer waiting periods reduce premiums significantly. If you have substantial sick leave entitlements or savings, you can choose a longer waiting period and pay less.
Benefit Periods
Income protection benefit periods determine how long payments continue. Options typically range from two years to age 65.
Shorter benefit periods suit temporary conditions you expect to recover from. Longer benefit periods protect against permanent disability that could prevent you from ever working again.
Longer benefit periods cost more but provide more comprehensive protection.
Making Your Decision
Consider your personal circumstances. Do you have dependents? How long could your family manage without your income? What resources do you have if you cannot work?
Many people prioritise life insurance first because the consequences of death are severe. Income protection adds another layer of protection against the more likely risk of disability.
A financial adviser can help you understand the options and build appropriate protection for your situation.
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