When people think about protecting their family financially, life insurance usually comes to mind first. But income protection insurance is arguably more important for many working New Zealanders. Understanding the difference helps you make better decisions about your cover.
The NZ Context: ACC Changes Everything
New Zealand's ACC scheme covers all accidents-work and non-work-at 80% of your income. This is unique globally. If you break your leg skiing or injure your back at work, ACC pays weekly compensation while you recover. This means income protection in NZ is primarily about covering illness, not accidents. Cancer, heart disease, mental health conditions, and chronic illnesses are not covered by ACC. Since you are statistically more likely to be unable to work due to illness than injury, income protection fills a critical gap that ACC does not address.
What Life Insurance Does
Life insurance pays a lump sum to your beneficiaries when you die. The payment can be used however they choose, whether to pay off the mortgage, cover living expenses, fund children's education, or simply provide financial security.
The amount is fixed when you take out the policy. A $500,000 life policy pays $500,000 regardless of whether you die tomorrow or in 30 years (assuming you keep paying premiums).
Life insurance is particularly important when others depend on your income. If you have a mortgage, children, or a partner who would struggle financially without your income, life cover protects them from that scenario.
It is less critical if you are single with no dependents, have substantial assets that would pass to your estate, or are retired with no ongoing income to replace.
What Income Protection Does
Income protection insurance pays a regular income if you cannot work due to illness or injury. Rather than a lump sum at death, it replaces your income while you are alive but unable to earn.
Cover typically pays 60-75% of your pre-disability income (capped at a maximum monthly benefit). Payments begin after a "waiting period" (typically 4-13 weeks) and continue until you recover, reach the policy end date, or reach the maximum benefit period.
Benefit periods vary. Some policies pay for two years, others to age 65 or for life. Longer benefit periods cost more but provide better protection against permanent disability.
Income protection matters because disability is more common than death during working years. Your chances of being unable to work for an extended period due to illness or injury are significantly higher than dying before retirement. Yet most people have life cover but no income protection.
Comparing the Two
Life insurance protects against one event (death). Income protection protects against many events that could prevent you from working.
Life insurance pays once. Income protection can pay repeatedly for different illnesses or injuries throughout your life.
Life insurance helps your family after you are gone. Income protection helps you and your family while you are still here but unable to earn.
Life insurance is simpler. You die, the policy pays. Income protection involves ongoing claims management, medical assessments, and potential disputes about capacity to work.
Life insurance premiums are generally lower for the same benefit amount. Income protection covers a more likely event and ongoing payments, so it costs more.
Do You Need Both?
For most working people with dependents or mortgage commitments, both types of cover make sense.
Life insurance protects your family if you die. Without it, your death could mean your family loses their home or faces severe financial hardship.
Income protection protects everyone (including yourself) if you cannot work. Without it, a serious illness or accident could mean losing your home and financial security while you are still alive.
The question is not usually "which one" but "how much of each."
How Much Life Cover?
Common approaches to calculating life insurance needs include income replacement (10-15 times annual income provides enough to invest and draw a replacement income), needs analysis (calculate mortgage payoff plus education costs plus income replacement for a period plus final expenses), and debt coverage (enough to pay off the mortgage and other major debts).
For someone with a $500,000 mortgage and two children, life cover of $750,000-1,000,000 might be appropriate. The exact amount depends on your partner's earning capacity, other assets, and how long income replacement is needed.
How Much Income Protection?
Income protection typically covers 60-75% of your income, not 100%. Insurers limit cover to prevent over-insurance and reduce fraud incentives.
The waiting period (time before payments begin) significantly affects cost. A 4-week wait costs much more than a 13-week wait. If you have substantial savings or sick leave to bridge a few months, a longer waiting period saves premium costs.
The benefit period (how long payments continue) matters more than many people realise. A two-year benefit period is cheaper but leaves you exposed to permanent disability. Cover to age 65 provides more complete protection.
For most people, a policy covering 60-75% of income, with a 4-8 week waiting period, and benefit payments to age 65 provides solid protection.
Other Types of Cover
Life and income protection are the main categories, but other products fill specific gaps.
Trauma (critical illness) insurance pays a lump sum on diagnosis of specified serious conditions like cancer, heart attack, or stroke. It provides immediate funds for treatment, lifestyle adjustments, or mortgage reduction regardless of whether you can work.
Total and permanent disability (TPD) cover pays a lump sum if you become permanently unable to work. It bridges the gap between death and temporary disability.
Mortgage protection insurance specifically covers mortgage payments if you cannot work. It is simpler than income protection but more limited.
Affordability Considerations
Comprehensive cover across all categories is expensive, particularly as you age. Many people need to prioritise.
If forced to choose, income protection often provides better value than life insurance for those with working years ahead. The risk of disability during working life exceeds the risk of death, and the financial impact can be just as severe.
If you have limited budget, consider higher excesses/waiting periods rather than reducing cover amounts. A policy that pays in a serious claim is more valuable than cheaper cover that leaves gaps.
Review cover as circumstances change. What made sense at 35 may not fit at 55. As your mortgage reduces and children become independent, your insurance needs typically decrease.
Getting the Right Cover
Insurance is complex, and policies vary significantly in their definitions, exclusions, and terms. Getting advice from a qualified insurance adviser helps ensure you have appropriate cover for your situation.
Watch out for cheap policies with restrictive definitions. Income protection policies vary in how they define "disability." Some pay only if you cannot work at all. Others pay if you cannot do your specific occupation. The difference matters enormously if you become partially disabled.
Be honest on applications. Non-disclosure of medical history or lifestyle factors can void your cover entirely. The time to discover a policy will not pay is not when you are making a claim.
Review and update cover regularly. Life changes, health changes, and insurance needs change. An annual review ensures your cover keeps pace.
Need Help With Your Insurance?
Our expert advisers will help you find the best adviser for you. Get in touch to be connected with a professional insurance adviser.
Talk to an Adviser
