Key Takeaways
Income protection insurance in NZ pays a monthly benefit if illness or injury stops you working, and the way your cover is structured decides how much you receive and for how long. This guide explains indemnity and agreed value cover, waiting and benefit periods, and how ACC payments interact with a policy.
- Income protection can cover illness as well as injury. ACC only covers accidents.
- Indemnity cover is based on your income at claim time. Agreed value cover is set when you apply.
- The waiting period is how long you wait before payments start. The benefit period is how long payments can last.
- Most policies reduce your benefit by other income such as ACC weekly compensation.
- Your occupation, age, smoking status and the options you choose all shape the premium.
How income protection insurance works in NZ
Income protection replaces part of your income if you cannot work because of illness or injury. Once your claim is accepted and the waiting period has passed, the insurer pays a monthly benefit until you recover, the benefit period ends or you reach the expiry age set out in the policy. The benefit is paid to you, so you can use the money for rent, mortgage repayments, groceries or anything else.
What the benefit is based on
Insurers limit the monthly benefit to a percentage of your pre-disability income, as set out in the policy. You can choose to insure less than the maximum to lower the premium, but the insurer will not pay more than the policy limit. The benefit is designed to replace part of your income, not all of it, so that people have a reason to return to work when they are able.
Total and partial disability
Most policies pay a full benefit if you are totally unable to do your usual job and a partial benefit if you can return to work on reduced hours or duties. Check how the policy defines disability. Some definitions refer to your own occupation, while others consider whether you can do any work suited to your training and experience. The wording matters most for people in skilled or physical jobs.
What income protection does not cover
Policies have exclusions. Common examples are self-inflicted injury, some pre-existing conditions and claims linked to criminal activity, along with any specific exclusions the insurer applies to you after reviewing your health. Read the exclusions in your own policy schedule, as these are personal to you.
Indemnity vs agreed value income protection
This is one of the biggest choices you make when setting up income protection cover. The two types differ in when your income is assessed, which affects how certain the benefit amount is.
| Feature | Indemnity cover | Agreed value cover |
|---|---|---|
| When income is assessed | At claim time, usually based on recent earnings before disability | At application, using income evidence you provide then |
| Benefit if your income falls | Benefit falls with your income | Agreed benefit stays as set, subject to the policy terms |
| Evidence needed | Income evidence at claim time | Income evidence at application |
| Premium | Often lower | Often higher for the extra certainty |
| Often suits | Salaried people with steady pay | Self-employed people and those with variable income |
Indemnity cover
With indemnity cover, the insurer works out your benefit when you claim, based on your income over a period before you became unable to work. If your income has grown, your benefit reflects that, up to the sum insured. If your income has dropped, perhaps because you went part-time or your business had a slow year, the benefit drops too.
Agreed value cover
With agreed value cover, your income is assessed when you apply and the monthly benefit is agreed at that point. This gives more certainty, which can suit people whose earnings vary from year to year. The trade-off is usually a higher premium and the need to provide income evidence up front. You may also need to review the agreed amount if your income rises.
Self-employed and variable income
If you are self-employed, insurers will usually look at your business income after expenses, using financial statements or tax returns. A strong year followed by a quiet one can make a big difference to an indemnity benefit, which is why many self-employed people look closely at agreed value cover. An adviser can show you how each option would treat your income history. Keep tidy records either way, because the insurer will ask for income evidence at some point.
Tax treatment
The tax treatment of premiums and benefits can differ between indemnity and agreed value policies. Talk to your accountant or Inland Revenue about how your policy is treated before you rely on any tax outcome.
Waiting periods and benefit periods
These two settings have the largest effect on your premium after the benefit amount itself. They also decide how much of the financial gap you need to fund yourself.
Choosing a waiting period
The waiting period is the time between becoming unable to work and the point when benefits start to accrue. Options commonly range from a few weeks to two years. A longer waiting period lowers your premium, so the right choice depends on how long savings, sick leave or a partner's income could carry you. Remember that benefits are usually paid monthly in arrears, so your first payment can arrive some weeks after the waiting period ends.
Choosing a benefit period
The benefit period is the maximum time payments can continue for one claim. Common options are a fixed term, such as two or five years, or payments up to a set age such as 65. A shorter benefit period costs less, and many claims are relatively short. The real protection of a long benefit period is against a serious illness or injury that keeps you out of work for many years.
Balancing the two
Many people find better value in a longer waiting period paired with a longer benefit period than the reverse. Short absences can often be covered from savings and leave, while a long-term loss of income is very hard to recover from. Run the numbers on a few combinations before deciding.
How ACC fits with income protection
ACC covers injuries caused by accidents in New Zealand. ACC does not cover illness. According to ACC, weekly compensation is up to 80% of your earnings if ACC covers your injury, with a maximum weekly amount that ACC adjusts each year. ACC does not pay for the first week off work. If you were injured at work, your employer must pay 80% of your usual pay for that first week.
ACC offsets
Most income protection policies reduce the monthly benefit by other disability-related income, including ACC weekly compensation, for the same period. So if you are injured in an accident, you may receive most of your income from ACC and a smaller amount, if any, from your policy. Check exactly which payments your policy offsets.
Why illness is the bigger gap
Because ACC covers accidents only, illness is where income protection matters most. Cancer, heart conditions, strokes and many mental health conditions are not covered by ACC, so without private cover your options would usually be savings, family support or a means-tested benefit. Our guide to ACC and income protection goes into this in more detail.
Optional features and alternatives
Policies offer optional extras that change both the protection and the premium. Some are worth considering for most people and others only suit particular situations.
Common optional features
- Inflation adjustment: increases your sum insured each year so cover keeps pace with rising costs.
- Specified injury benefit: pays a set amount for listed injuries, regardless of whether you return to work.
- Return to work support: rehabilitation and assistance to help you get back to work sooner.
- Future insurability: lets you increase cover after events such as a pay rise without new medical questions, within limits.
Mortgage protection as an alternative
Mortgage repayment cover pays a set amount linked to your home loan repayments, usually with simpler income evidence at claim time. Mortgage repayment cover can suit people whose main concern is keeping the house, but the benefit is limited to the repayments. Learn more about mortgage protection insurance.
What affects your income protection premium
Premiums reflect the risk that you will claim and the size and length of any claim. The main factors are:
- Your age, gender and smoking status.
- Your occupation, which insurers group into classes based on claim risk.
- The monthly benefit and whether you choose indemnity or agreed value.
- The waiting period and benefit period.
- Your health history and any loadings applied at underwriting.
- Whether you choose stepped premiums, which rise with age, or level premiums, which are set to stay steadier for a period.
Answer the insurer's health and income questions accurately and completely. Under current New Zealand law, you need to disclose anything that could affect the insurer's decision. If you are unsure whether something is relevant, disclose it or ask your adviser.
How SHARE - The Advisory can help
We help you size your income gap, compare indemnity and agreed value options and choose a waiting and benefit period that fits your savings and budget. We also factor in ACC, any workplace cover and your mortgage. If you are still deciding who to work with, read our guide to choosing an income protection adviser, explore our income protection insurance service or get in touch.
Conclusion
Income protection insurance in NZ is built from a few key settings: the benefit amount, indemnity or agreed value, the waiting period and the benefit period. Each one changes how your cover responds and what the premium costs. Because ACC only covers accidents, illness is the main gap private cover fills.
Start with your essential costs and the support you already have, then choose settings you can afford to keep for the long term. Review your cover whenever your income, job or mortgage changes. This article is general information only and is not personalised advice.
Frequently Asked Questions
What is the difference between indemnity and agreed value income protection?
Indemnity cover bases your benefit on your income at claim time. Agreed value cover sets the benefit when you apply, using income evidence you provide then, which gives more certainty if your income later drops.
Does income protection cover illness in NZ?
Yes, income protection policies generally cover both illness and injury, subject to the policy terms and exclusions. ACC only covers injuries from accidents.
Can I get income protection and ACC at the same time?
You can hold both, but most policies reduce your benefit by ACC weekly compensation paid for the same period. Check the offset terms in your policy.
What waiting period should I choose for income protection?
Choose a waiting period that matches how long you could cover your costs from savings, sick leave or other income. A longer waiting period lowers the premium.
How much does ACC pay if I cannot work?
ACC weekly compensation is up to 80% of your earnings for an injury ACC covers, capped at a maximum weekly amount that ACC adjusts each year. ACC does not pay for the first week off work.