Income protection insurance and life insurance – what is the difference?
Us Kiwis live our lives to the fullest, and life insurance can help protect us against hurdles that come our way. Because our life is precious – not just to us but to our whānau and hoa. Another thing precious in life is our ability to earn a living – allowing us to enjoy the good things in life, rather than just making ends meet. Income protection insurance can offer a safety net when it comes to safeguarding our income.
So, you could say that life insurance and income protection insurance are two peas in a pod, but there’s definitely a difference between the two! If you’re researching all your insurance options, here’s some differences between income protection insurance and life insurance.
What is income protection insurance?
Income protection insurance allows you to insure a percentage of your income (up to a maximum amount) as a New Zealand resident of working age, which can vary from insurer to insurer. For example, with OneChoice Income Protection Insurance, you can apply if between the ages of 16 and 60.
Should you become sick or get injured for a specified period of time until a maximum age (and meet any eligibility criteria), your income protection insurance policy will cover a portion of your income.
Keep in mind, you also must have an eligible job or work to apply for income protection insurance and work a certain number of hours a week, depending on your insurer. For instance, with OneChoice, you have to work at least 15 hours each week.
Income protection insurance can be great for employees, self-employed business owners, as well as contractors.
Income protection insurance cover options
Different insurance providers will offer different levels of protection, but usually, you can apply to cover up to 75% of your monthly pre-tax income, up to a certain amount.
That means if you’re earning $10,000 every month (before tax), then you could cover up to $7,500.
Much like being employed, these payments would typically land in your bank account monthly. However, you would need to check your policy to see if these payments would be subject to tax or not, as this can vary.
Waiting period
It’s also important to note that your cover may not start right away. When you select a policy, you will have the option of choosing a waiting period. For example, with OneChoice, you can choose a 30-day or 90-day waiting period – this is how long you will have to wait from the time you become sick or injured before your benefit period starts.
Benefit period
A benefit period is how long you can receive your monthly benefits if you can’t work due to your sickness or injury, which can be anywhere from a few months to a few years. For example, with OneChoice (depending on eligibility), you can apply for a benefit period of 6 months, 1 year, 2 years, or 5 years.
Benefits and considerations of income protection insurance
As you might imagine, having your income protected comes with a variety of benefits and considerations, such as waiting periods and benefit periods.
For one, you’ll still have your mortgage or rent, utilities, food bills, car repayments together with service and maintenance, and all the other everyday expenses that your income usually covers (phone, internet, clothes, snacks, school/uni).
Having a plan B for a scenario where you can’t earn an income means you may still help cover any debts and pay for family expenses, without necessarily compromising your lifestyle.
Recurrent disability benefit
Your policy may also include a recurrent disability benefit. This means that if your sickness of injury returns within a certain period of time since the last benefit payment of your previous claim, it’ll be counted as a continuation of the first claim. You won’t have to go through another waiting period before you receive your benefits, provided you are still within your benefit period. For example, with OneChoice Income Protection Insurance, you can apply for the recurrent disability benefit if you are sick or injured again with six months of your last income benefit payment.
Rehabilitation benefit
Your income protection insurance policy may include a rehabilitation benefit. This means that if you actively take part in a rehabilitation program to help you recover and return to work, you can receive an additional reimbursement for participating in that program. For Instance, with OneChoice, you can get a rehabilitation benefit of up to 50% of your income benefit each month. You can claim for up to six months, to a maximum of $3,000. Or, you could have the option to get reimbursed six times your income benefit towards expenses to support your efforts to return to work – this could include things like accessibility or special equipment to help you perform your duties.
Difference between ACC and income protection insurance
But let’s not forget ACC, the government-run program that ensures eligible people who get injured will receive up to 80% of their pre-injury salary (as well as cover for any medical costs or physiotherapy treatments along the way).
The biggest difference between income protection insurance and ACC is that ACC generally does not cover sicknesses. Income protection insurance can be far more comprehensive, as it offers cover for both sicknesses and injuries.
What is life insurance
And then there’s life insurance. This kind of policy offers a lump sum payment should you pass away or become terminally ill. Your premiums would largely depend on your current age, how much you opt to be insured for, and other factors.
Subject to eligibility criteria, if you pass away, the payment will go directly to the beneficiaries you have listed in your policy. But should you become terminally ill, the payment will go directly to you.
Life insurance cover
Typically, life insurance coverage is pretty straight-forward.
There may be some terms and conditions in your policy to be aware of, such as the exclusion of suicide for the first year or so. And for terminal illness benefits, you may need to be diagnosed by a doctor and have a life expectancy of 12 months or less to live in order to receive the payment.
There are unfortunately many common misconceptions when it comes to who can or cannot be covered, so be sure to do your research and investigate your provider’s policy options, terms and conditions.
Benefits and considerations of life insurance
The benefits of life insurance are largely that your loved ones will receive a lump sum payment after your passing that they can use however they need. Typically, this will go towards covering large bills that you would otherwise pay for (such as a mortgage), but it can also help with things like securing your family’s financial future.
Should you receive a payment for a terminal illness diagnosis, this can give you some financial security, allowing you to better enjoy the time you have left, rather than stressing about bills on top of everything else.
As noted previously, there are additional considerations about life insurance, such as any applicable waiting periods, exclusions, and limits. You can find more information in the policy documents.
Income protection insurance and life insurance
There are a few key differences between income protection insurance and life insurance.
- Income protection insurance typically offers monthly payments, whereas life insurance would provide one lump sum payment.
- Life insurance only pays out should you pass away or receive a terminal illness diagnosis. Income protection insurance offers payments if you are unable to work for an extended period of time due to sickness or injury. Noting, there is eligibility criteria to both.
- Income protection insurance is limited by your existing income (typically up to 75%), whereas life insurance benefits can be much more wide ranging – potentially up to 2 million dollars.
- Income protection insurance premiums can be tax deductible, so you can claim on it as part of your tax return. But be sure to seek professional advice from a financial advisor. Life insurance is not tax deductible.
- Income protection insurance premiums may include GST. You may be able to claim it back if you are a sole trader or a small business owner, and are GST registered. Check with your financial advisor to get the right information based on your circumstances.
Choosing the right cover for your needs
We can’t tell you which is the right policy for you (sorry!). Only you can make that decision, or you can speak to a financial expert about which option could be best for your specific situation.
What we can do is offer you a quote. Learn more about OneChoice Income Protection Insurance online and request a quote today.
You can also find out more about OneChoice Life Insurance before making a decision on what would be best suited to your circumstances – it could be one or the other, or both, or neither!
This article is an opinion only, provided for general information purposes and shouldn’t be considered or relied upon as professional or personal advice. If you have legal, tax, or financial questions, you should contact an appropriate professional.
28 Sep 2024