I’ve said for many years that Kiwi's love being self-employed, and we seem to switch between employed and self-employed a lot. Some succeed, some have a change of direction, and some are about a change of situation. The point is that change is inevitable.

What will surprise you; typically, there are over 45,000 start-up businesses each year in New Zealand. Anecdotal evidence also suggests that a large number of these businesses are registered with the Companies Office early in the new year. Unfortunately, a lot of these businesses will simply fail due to cash-flow constraints. Some will be because the business isn’t sustainable, but the more likely reason is someone got injured or was prevented from working due to a disability.

I work but don't get paid; the insurance company won't insure me.

This is probably right for disability-related benefits. Not to diminish what you do, but lots of valuable people in our community do essential things but don't get paid for it; mothers and volunteers tend to top that list.

One of the factors with this is that insurance companies insure for financial loss; with unpaid occupations, this is hard to quantify.

I've spent 24 years in financial services, during which time I've worked on a significant number of difficult income protection claims. I still don't understand why the indemnity-first approach for income protection still prevails with the majority of advisers in today's environment.

Well, I do. It's not the client-first approach we'd all like to expect. Advisers have to do less and get paid more, but that's another story.

In basic terms, income protection insurance in New Zealand replaces a percentage of your income when you cannot work in your own occupation due to medical or injury reasons. 

It is designed to provide 75-80% of your in-hand earnings when you are disabled at claim time.

Most policies today have a range of options and different flavours. Fundamentally, there are two types: those you pay tax on at claim time and those you do not. 

Insuring your home seemed to be an easy task. You’d ring up an insurance company, they’d tell you what your home is worth and then you’re covered. If you make a claim, they pay up and you can repair or replace your home exactly how it was. But wait, because just like an infomercial, there’s now more to it.

One-Third of Kiwi Homes May Be Underinsured

Offsets are one of the most contentious and least understood provisions of an Income Protection contract with policy holders.

Why?

Simply it's not a selling point so it's glossed over in the advice discussion.

Keep in mind, having some cover is better than no cover, but having the right cover is even better.

I'm going to explore offsets in this article so you have a better understanding of what this may mean to you.

Interesting question, up there with what's the best value income protection?

The answer to both questions is a good quality income protection solution. It will both work at claim and give you great value as a result. The way to do this is talk to a good adviser who will arrange this for you, that's me.

If you mean best value equals cheapest premium, then you have to ask the question do you expect to claim? If not, why have it? Cheapest like most things in life usually translates to inferior.

Obviously, if you are laid off, but when is it going to be the most use to you?

Often there are comments redundancy protection is expensive relative to the cost of income protection. For those looking at income protection under the age of 40 this is often the case. Income protection pays up to age 70, redundancy protection only pays up to 6 months, with redundancy protection sometimes costing more than income protection for those under 40. Cost is relative, for a 50 year old it can be less than 25% of your overall cost of income protection even though redundancy protection premiums are the same for all ages.

Let's have a closer look at this picture.

You have a mortgage which is why you're probably asking this question, so the logical leap is you have a mortgage because you either don't have the financial resources not to or you wish to leverage your capital for the maximum return. Either way you have taken on a financial risk by having a mortgage.

If things go to plan and nothing happens to you or your property then the risk has not been realised, the question then becomes what if the risk is realised?

Mortgage Protection Insurance is how you go about mitigating this particular financial risk.

Taking a lead from a colleague on blog questions, I've talked extensively on what is income protection, how it works and how to apply it to your situation. What I haven't explained is what it is likely to cost you.

Taking into account that everyone has a different situation, occupations, levels of income, medical history and available financial resources I am going to football the averages for you.

Today in New Zealand the average gross taxable income for earners is about $55,000. I'm going to use this as my base income to establish the cover level using a net of tax, agreed value approach.

Also called premium waiver or premium cover. In a nutshell, it is insurance for your insurance premiums. Ok stop there! Before you go 'huh? I don't need that', consider the following.

The point of waiver of premium benefits is to pay your policy premiums when you are disabled and unable to work. Extending this logic, if you are disabled and unable to work, your income has likely stopped or reduced, often significantly.

If you have a reduction in income due to a disability, it is likely you may miss a premium payment or two. Miss three (months) and your insurance cover will lapse.

If you are pregnant or looking to have children, this is a great question to be asking.

To start with, you will be focused quickly on how baby is doing and finding the right baby things for you to be using, then after baby arrives, you will be too busy with baby to think about insurance.

One insurance thing you do need to put on the to-do list, is adding baby to your medical insurance cover within three months of arriving, this article talks more about baby. This post is about you as mum.

In general, if you have income protection you will have some disability coverage for the first 12 months after finishing work, if you are on maternity leave for longer than this, then things get a little more interesting.

I cover a lot of ground in this post, though a bit of a lengthy technical one. Maybe that's part of the reason protecting incomes is not high on the completed tasks list, as policy details can get quite complicated.

I have mentioned before that income protection in New Zealand is not something that is well covered, much like the rest of the world. With about 80% of the population without financial support in a non-accident disability situation. This comes with potentially limited support with ACC. There is a lot of exposure not only for you personally, but also for your family members, co-workers, suppliers and clients.

What is the real risk?

Insurance is one of those things people do not like paying for and often bundle it in with power, interest, rates, tax and bank fees. Something to address when we really have to until then, we will ignore it and just pay the bill.

Insurance is about covering a loss, well a potential loss. Because you need to take insurance before you have the loss in order for it to work. People comment ‘but it should cover X, because I know about X and that is what I want cover for’. If you know about X then the insurance company is unlikely to bet on X because it is likely to be a sure loss for them.