Look before you leap. Aussie shopkeepers and Kiwi small business owners. Terms often used by people looking at our respective markets when looking at the predominant structures for trade and commerce.

Probably not too far wrong, New Zealand has one of the highest per capita self-employed rates in the world. Which is why I am focussing this posting on those of you who are employed rather than self-employed. Because employed Kiwis often have a change in situation and end up self-employed.

That is not those of you who own your own business and pay yourself PAYE, you are still in the self-employed camp. I am talking to those who are employees who have little (<20%) to no ownership interest in the business they work for. Business owners, read on here this is more relevant for you.

Why the rant in this particular direction?

As an insurance adviser, we often get a hard time with what we do, especially so when people pay for insurance cover and it does not work as expected at claim time. This is most obvious with self-employed income protection at claim time.

The predominant income protection type put in place in New Zealand is indemnity or loss of earnings. For many people this is taken when employed on a good salary and when you go self-employed, it just carries on, with people thinking they are covered.

The hidden issue is these types of policies rely on you proving a loss of income at claim time. For self-employed this is usually the best 12 months of earnings in the last 36 months. For the first 1-2 years self-employed, you are probably ok, as your employed earnings could still be used for a claim. The issue surfaces after this.

You are now fully self-employed and you have may well be turning over equal to more than your employed earnings. Because you now have business accounts, interesting structures and tax minimisation, your taxable earnings are likely to be quite a bit less than when you were employed. The insurers use for your claim, not your business turn over before expenses, but this tax assessable figure.

I hear at least once a month when talking to someone new, 'I had income protection as an employee but now that I've been self-employed for more than 3 years, I've cancelled it because I couldn't claim what I was insured for'. As an insurance adviser, this is not what I want to be hearing, as it means that person has not had the right advice and has paid for cover that is not useful to them long term. No wonder we get a bad wrap at times.

What is the answer?

Agreed value cover. Simple answer, complicated solution.

The key with agreed value cover is it is an agreed level of cover at the point of application. When it comes claim time, you have to prove your disability medically, but not your loss of income. There will still be some financial information needed at claim for assessing what income from your own exertion still continues as this may be subject to being offset, this applies to indemnity and loss of earnings too.

With agreed value, you need to get it in place when you can prove your taxable income and before you make plans to change your occupation. Doing this once you have planned to be self-employed is going to create issues, as the underwriter needs to be made aware of your pending change in situation and will most likely offer indemnity or loss of earnings rather than agreed value, which does not protect your nice corporate salary. If you have already made plans we do have other options available, get in touch and we can have a chat about what is approprite for you.

There are additional considerations for partial disability, these are generally similar to what you will find with indemnity and loss of earnings policies as well.

If you have indemnity or loss of earnings income protection, you can probably move this to agreed value without too much hassle and without medical exposure, with your current insurance provider.

If you do not have cover or you have indemnity or loss of earnings cover, and you want to get advice on getting this right for you, get in touch with us. We are happy to help so you get value from your insurance cover when you really need it, rather than find it has been a waste of money when it is too late.

Either way having a chat to us about your income protection to ensure it will do what you expect it to is a good idea, check us out here or get in touch