Income Protection Insurance

Income protection insurance (IP) — also called income replacement or disability income insurance — pays you a monthly benefit of up to 75% of your pre-disability gross income when illness or injury prevents you from working. Unlike mortgage protection or loan repayment cover (which pays your lender directly), income protection pays you, giving you the flexibility to allocate the benefit across all financial commitments — mortgage, car loan, credit cards, groceries, school fees.

In New Zealand, income protection is underwritten by the life insurance sector — AIA, Partners Life, Fidelity Life, Asteron Life, and Chubb Life all offer IP products through licensed financial advisers. The benefit is expressed as a monthly sum insured, limited to 75% of your pre-disability monthly income. Why 75%? Sufficient to maintain your standard of living (most people spend a fraction of income on discretionary items they'd cut during disability), while retaining a financial incentive to return to work when able.

Income protection addresses the most significant financial gap in New Zealand's safety net. ACC covers work accidents and all accidents — but not illness. WINZ Jobseeker Support provides a very modest income (around $350/week) that falls well short of most borrowers' mortgage payments alone, let alone total living costs. For a household earning $100,000/year, IP at 75% generates $75,000/year in benefits — far more meaningful than the government safety net, and sufficient to maintain a family's lifestyle during recovery.

Self-employed New Zealanders face a more acute income protection need than employed workers for three reasons: no employer sick leave, no employee redundancy protection, and income that's inherently variable and potentially illiquid during disability.

ACC Cover Plus Extra (CPE) allows the self-employed to choose their agreed value of lost earnings — up to 100% of pre-accident earnings — in exchange for a higher ACC levy. CPE is valuable for accident coverage but cannot help with illness. If a self-employed builder develops a serious back condition, a sole trader accountant is diagnosed with cancer, or a contractor experiences a mental health crisis — ACC provides nothing. Income protection fills this gap entirely.

The tax treatment of IP premiums for the self-employed is another advantage. IP premiums paid personally by a self-employed person are generally not tax deductible as a personal expense. However, if the benefit would be taxable on receipt (which IP benefits paid for income replacement generally are), there may be a symmetry argument. Discuss with your accountant — the rules are nuanced.

For self-employed borrowers with business loans, IP can be structured to include business overhead protection — a separate or combined product that covers business fixed costs (rent, loan repayments, utilities) while you're disabled, rather than just personal income. This is particularly relevant for professional practices (doctors, dentists, lawyers) where premises costs continue whether or not the principal is working.

Understanding the ACC interaction is essential to structuring IP correctly in New Zealand. ACC covers all accidents — on the road, at work, or at home — and pays weekly compensation of 80% of pre-injury earnings up to a statutory cap. This means for accident-related disability, you may receive both ACC compensation and your IP benefit.

IP policies in NZ handle this in one of two ways: ACC offset or non-offset. Offset policies reduce the IP benefit by the ACC payment received — the policy tops up to the agreed benefit level, with ACC providing the base and IP filling the gap. These policies are cheaper because the insurer's exposure is lower for accident claims. Non-offset policies pay the full IP benefit regardless of any ACC payments — giving you both, which can result in total benefits exceeding 75% of pre-disability income for accident claims (but not illness).

For illness — cancer, heart disease, mental health — ACC pays nothing, and the full IP benefit activates unmodified. Since illness is the most statistically common cause of long-term disability in NZ, this is where IP provides the majority of its value over the policy's life.

Waiting periods (also called deferral periods) interact with ACC timing too. If you select a 13-week waiting period and ACC begins paying weekly compensation within that period, your ACC payments cover the waiting period. After week 13, your IP benefit commences, and if the policy has an ACC offset clause, the IP benefit reduces by the ACC compensation amount.

New Zealand income protection policies come in two benefit calculation types: indemnity value and agreed value. The distinction is critical and affects how claims are calculated years into the future.

Agreed value policies lock in your benefit amount at the time you apply. If you insure yourself for $7,500/month and make a claim three years later after a period of variable income (common for self-employed borrowers, commission salespeople, or business owners), you receive $7,500/month regardless of your actual income at the time of claim. Agreed value is more expensive at application but provides certainty.

Indemnity value policies pay based on your income at the time of the claim. If your income has fallen since you applied (through business slowdown or career change), your benefit is recalculated at claim time — potentially significantly lower than the sum insured. Indemnity policies are cheaper to apply for, but they carry income-at-claim risk for people whose earnings are variable.

For salaried employees in stable employment, indemnity value is usually appropriate — income at claim will likely be similar to income at application. For self-employed, commission-based, or variable-income borrowers, agreed value provides much greater certainty at claim time, even at a higher initial premium.

The starting point for calculating your IP benefit is your gross monthly income multiplied by 75%. For a $120,000/year earner, 75% = $90,000/year = $7,500/month. But this is the maximum — your actual need depends on your monthly expenses and existing income sources.

Step 1: calculate your essential monthly expenses — mortgage or rent, loan repayments, utilities, food, rates, insurance, minimum credit card payments, school fees. This is your floor — the benefit you absolutely cannot go below.

Step 2: identify other income sources in a disability scenario — a working partner's income, rental income from investment properties, ACC compensation (for accidents), KiwiSaver accessibility (hardship only, and with retirement impact).

Step 3: calculate the gap: essential expenses minus other income sources. Your IP benefit should cover that gap with a buffer. If you're single with a $4,000/month mortgage and no other income, you need at minimum $4,000/month in IP. If you have a partner contributing $3,000/month and your total expenses are $6,500/month, you might only need $3,500/month.

For NZ borrowers with large mortgages (Auckland and Wellington especially, where median house prices require $1M+ mortgages in many areas), the required IP benefit is typically in the $5,000–$9,000/month range for professional households. For regional borrowers with smaller mortgages, $3,000–$5,000/month is often sufficient.