What's the Drill with Income Protection Insurance?

Over the last decade most New Zealand life insurance companies have aggressively marketed what is known as Income Protection Insurance. Many people have purchased Income Protection Insurance, and many people have made successful claims. The principle of insurance is to make good a financial loss suffered, therefore Income Protection Insurance replaces the insured person's income when there is an income loss due to an illness or an accident.

Q Why insure an income?

A Income earned via physical exertion (working for money) provides the foundation stone of our living standard. A sudden loss of income can have a serious impact on the quality of persons or a family's life. Statistics show us that there is a high chance of being disabled during our working life.

Q What will an Income Protection Insurance policy pay if I am disabled?

A The insurance policy will replace up to 75% of the insured persons income (usually 75% of pre disability income) until the insured person can return to work or reach age 65.

For example: Paul is a painter/decorator, last year he earned $50,000. He stopped work due to a tendon problem in his right arm, Paul's doctor told the insurance company that he will be unable to work for 4 months due to the tendon problem. Paul has income insurance that will pay 75% of his income after 4 weeks disability. The insurance company paid Paul $3,125 per month after he had been off work for 4 weeks. Paul was paid $9,375 whilst he was disabled.

Q How much does Income Protection Insurance cost?

A Like most insurance cost is dependent on a number of factors such as: -

Age, Sex, Smoking Status, Occupation, Previous Income, Stand down period and Health History. The combination of these factors enables the insurance company to establish a premium.

For example: Paul the painter/decorator is aged 35 and does not smoke he paid a premium of $71.72 per month. The $3,125 per month benefit will be paid until Paul returns to work in a full capacity or reaches age 65. If Paul were an accountant or an engineer his premium would be $37.53 per month. The simple answer to the difference in premium is that a painter/decorator has more occupational risk than an accountant or an engineer.

Q Is the premium tax deductible?

A Yes in most cases the premium is tax deductible.

Many people regard their family home as their greatest asset, for most this is true, however we seem to overlook our ability to earn an income as being an asset. Let me explain.

Paul the painter/decorator's family see him as a money making machine (plus other benefits). The income of $50,000 could be compared to the rent a wealth person receives from a commercial property. How? If you owned a $1,000,000 commercial building and it was leased to a good tenant, you could expect to receive a $50,000 per annum income from the rent received. Alternatively if you had $1,000,000 invested at 5% with your bank you would also expect to receive an income of $50,000. Paul's ability to earn an income through his physical exertion is as valuable to his family unit as the $1,000,000 building is to the landlord. If you were the landlord would you insure the building against anything that could possibly happen, I know I would. Insuring your income is just as important.

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