Income Protection explained simply

We take our ability to work very much for granted, even though we often wish for the day when we don’t have to work. Getting to that day when we no longer have to work is going to depend on our ability to keep working, earning and saving however – and this is where income protection comes in.

Imagine if you couldn’t work because of illness and suddenly your income stops after just a few short weeks.  Many New Zealanders will be worrying within a month about where the money will come from for the mortgage, electricity, phone, rates, food, the list goes on.  You would quickly forget about the plans you had for holidays, entertainment, future lifestyle choices and and purchases.

There is no doubt that for the majority of people the ability to work and earn and ongoing income is their single biggest asset.

One of the problems we create for ourselves too is that the more we earn the more our lifestyle expectations increase...the more we spend on having a better life.

Maybe we think of ourselves as indestructible, but statistics tell us we are far more likely to have a disability lasting more than three months than we are to have our house burn down.  Yet we pretty much all insure our house...and cars...

Assessing the risk here is relatively simple. If we assume that as of today your income stops, it is simply a matter of working out if you can meet your commitments from a sickness benefit? There is the question of course as to whether you’d actually qualify for a sickness benefit – what if you are a double income family and only one income stopped because of sickness? Would it  matter which income stopped? If you are single would you have to move in with your parents or live in a boarding house with others that cannot afford to live independently?

That is the risk in its simplest terms.  If you want to reduce that risk you need to consider income protection insurance, which (in general terms) will provide you with an agreed amount or proportion of your lost income in the event of being unable to work due to illness or accident.

Once you decide to look into getting some income protection cover though, it gets complicated and there is absolutely no substitute for working with a professional adviser who understands the difference in types of contracts and how they would work at claim time.  No two products are exactly the same. And it is not as simple as “any Income Protection is going to suit you”.  Some will not suit you and your circumstances at all.

Some of the factors that will affect the choice of what income protection cover will work best for you will be things like:

• Whether you have a salary or are self-employed
• How much you have in savings, investments, leave entitlements
• If your income fluctuates from year to year
• If you get fringe benefits you rely upon (e.g. get a company car?)
• Do you have business expenses that continue while you are disabled
• Do you split your income for taxation purposes

Even with the help of a professional adviser who can work out which contract is most likely to be right for you and work at claim time, there is no guarantee that the cover you selected will be right forever more.  You have to review it regularly and make sure the cover you chose is still going to be the cover that works for you.