Income Protection and Mortgage Repayment Insurance
Income Protection – what does it cover, how does it work?
Income protection insurance is designed to provide an ongoing income if illness or injury prevents you from working. Understanding how it works, and where its limits are, is important when deciding whether it is appropriate for your situation.
What is the income protection insurance wait period and how does it work?
This is the period of time you expect to manage financially before benefits begin. Traditionally this will be four weeks, eight weeks, thirteen weeks or twenty six weeks.
For some people, 52 weeks (1 year) or 104 weeks (2 years) might be relevant, if their employer already provides cover for that time period (sick leave or an existing income protection insurance policy with that benefit period).The longer that you can afford to wait before the benefit is paid to you – the lower your premium will be (but 13 weeks and 26 weeks aren’t usually that different in cost).
The factors that you will take into account are how much sick leave you have, how many cash reserves/investments you have that you wish to use and how much other income is coming into the household, when deciding which wait period is suitable for you.
How is the cost of income protection insurance calculated?
- Your age
- Whether you are male or female
- Whether you are a smoker or a non-smoker
- Your occupation
- Your income
- Your wait period and your benefit period (see notes below)
- Which insurance company you choose to use
How do I work out what income protection insurance benefit is suitable for me?
Most income protection policies limit cover to a percentage of pre-disability income, commonly around 75%. This reflects the intention of replacing income rather than fully matching previous earnings.
However, every now and then, we meet someone who is saving a large amount of their income into investments, and who can genuinely live on a lower amount than 75% of their income after tax, if they are disabled. For most people though, the extra saving in premium is not worth reducing the benefit paid.
What happens when I go to claim on my income protection insurance policy?
We are concerned that some of our clients aren’t aware of the situations when they are entitled to claim on their policy. Some policy benefits may apply earlier than people expect. Depending on the policy, certain benefits can be payable even before the main income replacement benefit begins..
For example – if you have been hospitalised for three days or more, regardless of your wait period, you may well be entitled to a ‘daily hospitalisation benefit’.If you have a ‘specified sickness benefit’ (AXA policies) – and you contract one of the specified sicknesses, you may be entitled to claim on the policy, even if you are still earning an income.
There are many other benefits on different policies – rehabilitation benefits being one of them – that might start paying you when you need it – not necessarily waiting until your wait period is completed.
What is the income protection insurance benefit period and how does it work?
The benefit period is the length of time an insurer will continue paying benefits once a valid claim has been accepted. This is usually until recovery or until a specified age, commonly age 65.
Shorter benefit periods, such as two or five years, are available. These may be suitable in limited circumstances, depending on a person’s health, occupation, financial position, and proximity to retirement.
Income protection benefits are typically paid in arrears. This means that even after a waiting period has ended, the first payment is often received several weeks later. For example, with a four-week waiting period, the first payment may not be received until around eight weeks after you stop working.
When you claim on your policy, you need to be aware of the following things:
Any income that you are receiving from other sources will offset any benefit that you are entitled to receive
In general, if you are working more than 10 hours a week in your occupation, you are not considered to be totally disabled, and therefore may not be able to claim. (If your policy is not one arranged by Moneyworks, the definition may be different.)
Income protection insurance generally does not cover redundancy.
You need to note any exclusions that have been put on your policy because of pre-existing conditions.
If you had a pre-existing condition and you didn’t declare it, and you wish to claim for that condition – it is likely that your claim will be turned down.
What matters when choosing an income protection policy
Income protection policies can differ significantly in how they define income, disability, and eligibility to claim. These differences matter most at claim time.
When comparing policies, it is important to understand:
• How income and disability are defined
• What exclusions apply
• How claims are assessed and reviewed
• The insurer’s long-term financial strength
• How policy terms and premiums have historically changed over time
These factors can affect whether a policy responds as expected if you need to claim.
What happens with ACC if I claim on my income protection insurance policy?
If an illness or injury is assessed by ACC as an accident under their criteria, any income payments received from ACC are treated as income and will generally be offset against income protection benefits.
Income protection policies may still provide benefits that are not covered by ACC. In some situations, a claim under an income protection policy may be considered even where ACC is paying, as the definitions of income used by ACC and by insurers are not always the same.
Because of these differences, the total amount received may differ from what ACC alone would provide, depending on the policy terms and individual circumstances.
What factors matter when comparing income protection policies?
Income protection policies can vary significantly in their terms and conditions. These differences are often most important at claim time.
Factors that may affect how a policy performs include:
How income and disability are defined in the policy
The range of benefits included, such as rehabilitation or specific sickness benefits
The insurer’s financial strength and long-term stability
How premiums have changed over time
The insurer’s underwriting approach and how risks are assessed
Understanding these features can help ensure that a policy responds as expected if a claim is needed.
Claiming on your income protection insurance
Income protection insurance can play an important role in managing financial risk if you are unable to work. It is important to understand the features of your policy and when benefits may apply.
Particular benefits on your policy that you should be aware of are:
Hospitalisation, Bed Care or Nursing Benefit
This benefit enables you to claim usually after you have been bed-ridden or hospitalised for three consecutive days. This is regardless of your ‘wait or stand down’ period. This benefit can be useful where a policyholder is hospitalised or confined to bed.
Worldwide cover
The good quality policies will cover you while you are overseas. Very few companies will actually provide you with income protection insurance cover if you are already booked to travel overseas for an extended period (ie to work), particularly if you are going to the Middle East, or say Papua New Guinea.
However, if you already have a policy in place, and you go to the USA or the UK for several years to work, the cover will continue. Policy terms differ, and cover while overseas depends on the specific policy in place. Some policies will provide you with financial assistance to return home if you are going to claim on your policy for an extended time period.
There are many other benefits on the top quality policies, and the benefits differ greatly between different contracts.
The disablement process – how insurance can apply at different stages
Illness or injury does not affect everyone in the same way. In some cases, incapacity happens suddenly. More often, health declines over time.
Different types of insurance may become relevant at different stages, depending on the nature of the condition, the policy terms, and whether recovery is possible.
Temporary incapacity – unable to work for a period
If illness or injury prevents you from working for a time, income protection insurance may provide a regular replacement income, subject to the policy’s wait period and definitions. Payments are usually a percentage of pre-disability income and are assessed alongside any other income received.
Serious illness or major trauma
Some conditions, such as heart attack, stroke, or cancer, may trigger a trauma insurance payment if the policy criteria are met. Trauma insurance generally provides a one-off lump sum, which can be used flexibly to help manage costs during treatment or recovery, or to reduce financial pressure at that time.
Permanent Disability
If a condition means you are unlikely to return to work, income protection may continue (depending on the benefit period), but long-term financial needs often change. Total and Permanent Disability insurance, where held, is designed to provide additional support at this stage.
Death
If illness or injury results in death, life insurance may provide financial support to dependants. Life insurance is intended to replace lost income or support obligations when a person can no longer provide for others.
Mortgage Protection/Repayment Insurance
Mortgage Repayment Insurance can be set up on its own, or in conjunction with other insurance cover likeincome protection insurance or trauma insurance. Your insurance specialist will help you to work out the best combination of cover for you.
Mortgage Repayment Insurance is designed to provide funds to meet your monthly mortgage payments should you be unable to work for a period of time due to illness or injury. An attractive feature of this product is that any other income you may receive while on claim (such as ACC) is not offset against your monthly benefit payable by the Insurer.
Mortgage Repayment Insurance – how it works
Mortgage repayment insurance is designed to help meet regular mortgage payments if you are unable to work due to illness or injury.
In most respects, it operates in a similar way to income protection insurance. You select:
a wait period (commonly 4, 8, or 13 weeks), and
a benefit period (for example, 2 years, 5 years, or until age 65).
Once the wait period has passed and the policy conditions are met, the insurer pays an agreed monthly amount for the duration of the benefit period, or until you are able to return to work.
Each policy sets a maximum level of cover. As a guide, some policies allow cover of up to 100–110% of your regular mortgage payment, while others limit the insured amount to the actual repayment.
Mortgage repayment insurance focuses specifically on servicing debt. It does not replace income for other household expenses.
What to be aware of with mortgage repayment insurance
Mortgage repayment insurance will generally only pay a benefit if:
premiums are paid and up to date, and
all relevant information has been disclosed at the time of application.
Any pre-existing conditions disclosed at application may be excluded from cover, depending on the policy terms.
As with all insurance, the definitions in the policy determine when a claim can be made.
How much mortgage repayment insurance cover is needed?
The amount of cover required depends on individual circumstances. Factors commonly considered include:
the size of the mortgage,
how long you could manage repayments before a benefit starts, and
what other insurance cover is already in place.
Mortgage repayment insurance is often considered alongside other personal insurance to ensure responsibilities such as housing costs can be met during periods of illness or injury.
Moneyworks NZ Ltd
P: 0800 225 621
E: contact@moneyworks.co.nz
7c Hall Street, Cambridge 3434
Licensed Financial Advice Provider - FSP 15281
Regulatory Information: Moneyworks is a Licensed Financial Advice Provider (FSP15281), and AML Reporting Entity and is supervised by the Financial Markets Authority.