Q & A Income Protection Insurance
1. What is income protection insurance?
Income protection insurance is a type of insurance that provides individuals with continuity of income should they suffer a long-term illness, disability or other loss of income that is not covered by ACC.
2. Is there more than one kind of income protection policy?
Yes. One type of income protection insurance pays a percentage of your income after a qualifying period. You can also obtain income protection insurance for situations when an individual suffers trauma, disability or total permanent disability based on regular payments of a previously agreed amount. The right policy for you depends on your age and circumstances.
3. I thought if I was off work I was covered by ACC?
ACC automatically covers 80 percent of your income in the event of an accident that prevents you from working. It does not provide alternative income for you or your family in the event of a sickness, trauma or certain kinds of disability such as a stroke.
4. What exactly is the problem with not having income protection insurance?
The Government’s universal sickness benefit entitlement is around $343 a week. However entitlement to this benefit is affected by your partner’s earnings and is only available if your other household income is below a certain figure. This means that many families find themselves too well off as a household to qualify for a sickness benefit, but too poor to pay the mortgage and food bills.
Many families without income protection insurance would find themselves experiencing serious financial hardship very quickly if the main household income earner were off work for as little as a month.
5. Are the risks of losing income from sickness well known?
No, the general population is not aware of this risk, although research has clearly identified that the risk exists for the great majority of New Zealanders. Horizon Research has provided data that shows that only about 15 per cent (1 in 7) of New Zealand households have income protection insurance and that there are nearly one million households with incomes above $20,000 that would be vulnerable if they faced a long term illness that stopped a major earner in the household working.
Nearly 300 families in New Zealand face this situation every week. Nearly one million households (972,000) on incomes above benefit levels have this financial vulnerability.
6. Why don’t people buy income protection insurance?
Many people resist contemplating an eventuality such as the inability to work for three to six months or more. Unfortunately such a situation is statistically much more likely that a sudden death. While most New Zealanders prepare for the latter by taking out life insurance most fail to insure themselves and their families against a much more common financial hardships – sickness or disability.
7. Why is income protection insurance so “expensive”?
The major driver of the cost of income protection is the likelihood of a claim and its expected duration. Statistics show New Zealanders are 2.6 times more likely to lose income from being off work for six months or more as a result of sickness than of losing the same amount of work time as a result of an accident. The period you have off work after sickness is typically much longer than for an accident.
8. Why don’t we just add it to ACC?
The cost of extending ACC to cover sickness as well as accidents would increase levies dramatically because the frequency and duration of being off work is much greater than for accidents. However, this is something that policy makers could consider in the future.
9. How could we make Income Protection Insurance more affordable?
Probably the single most important way of achieving this would be for it to be offered as part of a package of insurances to all employees within KiwiSaver. This would spread the premium cost across a larger population base while the risk level that is being insured against remains the same. This would bring the general cost of such insurance down.
10. Why can’t this be included in KiwiSaver like it is in the Australian Superannuation Guarantee?
It could be. The FSC has suggested the Government consider including a basic level of life insurance and income protection insurance in KiwiSaver, similar to what currently exists in Australia. Basic cover of twice your salary for life insurance and up to two years of income protection insurance - paying 75% of previous earnings and with a stand down period of 3 months (during which time you would use up your annual leave, sick leave and some of your savings) - could be provided for about 1% of salary in KiwiSaver contributions up until the age of about 45.
11. What about those over 45?
After 45 the risk of sickness increases to the point where the premium rate would need to rise, to about 2% by age 50 and 6% by age 60. One way of dealing with this would be to allow people over 45 to purchase their own life or income protection cover for up to 1% of their contributions each year into KiwiSaver. By that stage they may feel that with less mortgage outstanding they need less life cover and could get by with income protection insurance along, for example 60% of previous earning, to enable the cost of the premium to be reduced.
12. Why does it work so well in Australia?
Australia’s Superannuation Guarantee Scheme has compulsory membership for employees so everyone is covered for some life and income protection. Unless we have universal coverage for KiwiSaver in New Zealand “bundling” life and income protection cover in KiwiSaver can’t fix the income protection problem for all employees.
13. What is the industry doing about the cost and accessibility of income protection insurance?
The industry is developing new types of policies and better information to encourage a greater number of New Zealanders to acquire income protection insurance. We have suggested to politicians that they consider including a base level of life and income protection insurance in KiwiSaver. This would assist with the overall cost of premiums.
In terms of accessibility, a number of FSC members such as AIA, AMP, Cigna, OnePath, Fidelity Life, Partners Life, Sovereign and Kiwi Bank, along with the Financial Services Council, now have websites where you can assess your income protection insurance needs without any sales pressure*. The industry, including companies such as in CIGNA, are also putting a lot of effort into making contracts and marketing information easier to understand so you have a clear understanding of what your policy covers.
14. What are the insurance industry trends?
Your adviser,bank or broker is now more likely to talk to you about income protection insurance as well as life insurance when you purchase your first home and/or take on a mortgage. There is also a greater diversity of financial advisers in the sector and it is hoped that this will encourage more women and a broader range of people from a variety of ethnic groups that had traditionally been very seriously underinsured to acquire the insurance that they need.
15. Why can’t we get rid of jargon, three letter acronyms and legalese?
The industry has used precise definitions of the limited conditions covered by a policy in order to manage the cost of income protection insurance in the past. The legal and medical language used has often left consumers unsure about what was covered and as a consequence consumers have sometimes found their particular sickness was not covered by their specific policy. The industry acknowledges the need to have simpler products that provide more comprehensive cover. It will seek to manage the increased cost associated with such policies by having longer stand down periods and offering the option of levels of payments that are below the traditional 75% of previous income.
16. Are rates for income protection likely to increase?
Yes. In recent years claims paid for income protection insurance have exceeded premiums paid so there has been pressure for rates to increase. This is believed to have occurred as a result of the current higher levels of unemployment. This means that people who have been off work with serious illness have found it harder to return to work. As a result, the duration of claims has increased.
17. How can middle income families afford income protection insurance?
The best way for middle income families to afford income protection insurance is for them to regularly review their total insurance cover package as their circumstances change. For example, as you get older, pay off your mortgage and your children are no longer dependent, your life insurance needs can reduce, freeing up more resources for income protection insurance.
18. Who should I approach to look at my personal situation?
Ask your adviser, bank or broker about the insurance products that they have which best meet your current needs. Provide them with the most complete information you can to allow them to form the most accurate picture possible of your circumstances. Review your insurance cover at least every 5 years and whenever a lifetime milestone occurs, such as forming a relationship, starting work, taking on a mortgage or paying one off, or as you prepare for retirement.
19. Why are about 25% of income protection claims rejected?
Many people who have a serious illness put in a claim against their insurance ‘just in case’ without a clear understanding of whether or not it is covered by their insurance policy. Unfortunately, some are declined because the conditions covered do not include the specific claimed for.
Life insurance, which by its very nature is very clearly defined, is usually more straight forward, provided you have declared any pre-existing conditions. For life insurance the proportion of claims approved is more than 98%. Very occasionally a claim is declined because of suspicion of fraud but those cases are extremely rare.
The trend towards using plain language marketing materials and contracts and more comprehensive policies for income protection insurance is expected to reduce claim rejection rates in the future.