ACC covers your injuries from accidents - but what happens to your income if you get sick and can't work for months? Income protection insurance fills that gap. Here's how it works, what it costs, and whether you need it.
Most Kiwis know about ACC. If you break your leg skiing at Ruapehu or get injured on a building site, ACC steps in to cover your medical bills and a portion of your lost income. It's one of the things that makes New Zealand's social safety net genuinely impressive.
But here's the gap that catches people out: ACC only covers injuries caused by accidents. If you're diagnosed with cancer, have a heart attack, develop a serious back condition, or struggle with a mental health issue that stops you working - ACC doesn't pay a cent toward your lost income. You're on your own.
That's where income protection insurance comes in. It's a policy that pays you a regular income - typically around 75% of your pre-disability earnings - if you can't work due to illness or injury. Think of it as a financial safety net for the thing ACC doesn't cover.
The reality is that illness is far more likely to put you out of work than an accident. According to Fidelity Life, one of New Zealand's largest life insurers, the majority of income protection claims they pay are for illness rather than injury. Cancer, musculoskeletal issues, and mental health conditions top the list.
Without income protection, your options during a prolonged illness are limited. You might burn through your savings, withdraw from KiwiSaver under hardship provisions, rely on a partner's income, or fall back on Work and Income benefits - which are well below what most people need to cover their mortgage and living costs.
For a lot of New Zealanders, their ability to earn an income is the most valuable financial asset they have. Income protection insurance exists to protect exactly that.
Income protection insurance is straightforward in principle. You pay a regular premium, and if you become unable to work due to illness or injury, the insurer pays you a monthly benefit until you can return to work or the benefit period runs out.
There are a few key terms you need to understand to make sense of how a policy works.
The benefit amount is the monthly payment you receive while you're unable to work. In New Zealand, this is typically capped at 75% of your gross pre-disability income. Insurers cap it at less than 100% so there's still a financial incentive to return to work when you're able to. Some policies also cover certain business expenses for self-employed people.
The waiting period (also called the stand-down period) is the gap between when you stop working and when the benefit payments start. Common waiting periods in NZ are 4 weeks, 8 weeks, or 13 weeks. A longer waiting period means lower premiums - the idea being that you cover the initial period from your own savings or sick leave, and the insurance kicks in once those run out.
The benefit period is how long the insurer will keep paying you if you remain unable to work. Options typically range from 2 years to age 65. A longer benefit period costs more but gives you protection against a worst-case scenario where you can't work for years.
Most income protection policies use an "own occupation" definition of disability in the first couple of years. This means you're considered disabled if you can't do your specific job - not just any job. After the initial period, some policies switch to an "any occupation" definition, which means the insurer could stop paying if they decide you could work in a different role. It's worth checking this in the policy wording.
The Consumer NZ guide to income protection has a solid breakdown of what to watch out for in the fine print.
Not all income protection policies are built the same. There are a few key distinctions worth knowing before you start comparing.
Agreed value vs indemnity. With an agreed value policy, the benefit amount is locked in when you take out the policy. If you earn $80,000 a year at that point, your benefit is based on that figure regardless of what you're earning when you make a claim. With an indemnity policy, the benefit is based on your income at the time of the claim - so if your income has dropped, your benefit drops too. Agreed value provides more certainty but tends to cost more in premiums.
Full income protection vs mortgage protection. Full income protection pays a monthly benefit you can spend on anything - mortgage, groceries, power bills, whatever you need. Mortgage protection insurance is a more limited form that specifically covers your mortgage repayments if you can't work. It's cheaper, but it only handles one expense. If your mortgage is your biggest financial commitment, mortgage protection alone might seem tempting - but keep in mind you'll still need to eat and pay the power bill.
Standalone vs bundled. Some insurers offer income protection as a standalone product. Others bundle it with life insurance or trauma cover. Bundling can offer savings, but make sure you're not paying for cover you don't need. Providers like Partners Life and AIA NZ offer both options.
The Canstar income protection guide has useful comparisons of different policy structures available in NZ.
Two different ways your benefit amount is calculated
In theory, anyone who relies on their income to pay the bills could benefit from income protection insurance. In practice, some people need it far more than others.
Self-employed and contractors. If you're running your own business or contracting, you don't get sick leave. You stop working, you stop earning. And while you pay ACC levies, those only cover accident-related injuries - not illness. For self-employed Kiwis, income protection is often the only safety net between a health setback and serious financial trouble.
Sole income earners. If your household relies entirely on your pay, the impact of losing that income is immediate and total. Mortgage payments, food, school fees, power - everything depends on you being able to work. Even a few months without income can be devastating.
People without significant sick leave. Some employers offer generous sick leave provisions, but many don't. If you've only got 5 or 10 days of sick leave banked up and you develop a condition that keeps you off work for three months, those days won't stretch very far.
People with large financial commitments. A big mortgage, car finance, or other debts don't pause just because you get sick. If you have significant financial obligations, income protection helps make sure they keep getting paid even when you can't work.
Tradespeople and physical workers. If your job depends on physical fitness - builders, electricians, nurses, farm workers - an injury or illness that affects your physical ability hits you harder than someone who can work from a laptop at home.
The Sorted.org.nz income protection guide has a useful checklist for working out whether income protection makes sense for your situation.
Getting a sense of the income protection landscape in New Zealand helps put things in perspective. Here are some key figures worth knowing.
New Zealand has a significant underinsurance problem. Research from the Financial Markets Authority (FMA) and various industry surveys consistently shows that most working Kiwis don't have income protection cover, even though losing their income would be financially catastrophic.
The gap between what ACC provides and what people actually need is larger than many realise. ACC covers around 80% of your income for accident-related injuries, but for illness - which makes up the majority of long-term work absences - there's no government safety net beyond Work and Income benefits, which are capped well below the average wage.
Premiums vary widely depending on your occupation, age, health, and the level of cover you choose. A 35-year-old office worker might pay $60-$100 per month for a solid policy, while someone in a higher-risk occupation could pay considerably more.
The interest.co.nz insurance section regularly covers trends in NZ insurance pricing and can give you a sense of how the market is moving.
The numbers that tell the story of NZ's income protection gap
Applying for income protection is more involved than getting a car insurance quote, but it's not as complicated as people expect. Here's what the process typically looks like.
Most applications in NZ go through either a financial adviser or directly through an insurer's website. Going through an adviser can be helpful because they can compare options across multiple providers and help match the policy to your situation. The adviser's fee is usually built into the premium, so it doesn't cost you extra.
The application itself involves a detailed questionnaire about your income, occupation, health history, lifestyle (including smoking, alcohol, and recreational activities), and the level of cover you want. Be thorough and honest - inaccuracies at this stage cause problems at claim time.
For larger benefit amounts or if your health questionnaire raises flags, the insurer may ask for a medical examination or request records from your GP. This is standard and usually arranged at the insurer's expense.
Once your application is assessed, the insurer will offer you terms. These might be standard rates, loaded premiums (higher than standard due to risk factors), or cover with specific exclusions for pre-existing conditions. You then decide whether to accept.
Providers like Fidelity Life, Partners Life, and AIA NZ are among the main income protection insurers operating in New Zealand.
What to expect from start to finish
Calculate your essential monthly expenses - mortgage, bills, food, transport. This helps you figure out how much cover you need and what waiting period works for your savings.
Use comparison tools or talk to a financial adviser to see what's available. Compare benefit amounts, waiting periods, benefit periods, and premium costs across providers.
Fill out a detailed questionnaire covering your income, occupation, health history, and lifestyle. Be thorough and honest - this information forms the basis of your cover.
For some applicants, the insurer may request a medical exam or GP records. This is usually arranged and paid for by the insurer. It helps them assess your risk profile accurately.
The insurer offers you terms - standard, loaded, or with exclusions. Review the policy wording carefully, especially the definitions of disability and any exclusions, before accepting.
Income protection policies can look quite similar on the surface, but the details make a big difference when it comes time to claim. Here's what to focus on when you're comparing options.
Definition of disability. This is possibly the single most important thing in the policy. Does the policy use an "own occupation" definition (you can't do your specific job) or an "any occupation" definition (you can't do any job at all)? Own occupation gives you broader protection. Some policies start with own occupation and switch to any occupation after 2 years.
Benefit period. Do you want cover for 2 years, 5 years, or all the way to age 65? A longer benefit period costs more but protects you against serious, long-term illness. If you're in your 30s with a big mortgage, a benefit period to age 65 might be worth the extra cost.
Waiting period. Match this to your financial buffer. If you have 3 months of expenses saved, a 13-week waiting period makes sense and will save you on premiums. If you'd struggle after 4 weeks without income, a shorter waiting period is worth paying extra for.
Premium structure. Some policies have level premiums that stay the same over time. Others have stepped premiums that start lower but increase as you age. Level premiums cost more initially but can be cheaper in the long run if you hold the policy for many years.
Built-in benefits. Many policies include extras like rehabilitation support, partial disability benefits (if you can work part-time but not full-time), and recurring disability provisions (if the same condition flares up again). These vary significantly between insurers.
On Compare.org.nz, you can get estimates from NZ income protection providers to see where premiums sit for your situation. From there, you can go to each insurer's site to get an actual quote and explore the full policy details.
Compare income protection insurance from NZ providers.
Compare Income Protection