When it comes to insurance the questions I spend most time answering is “Income Protection and ACC, so how does that work?”
Income Protection and ACC, What’s The Difference?
If you already know the difference then I apologise but many of my customers don’t. That means I am going to take a few words to go over the headlines. Simply put ACC is state insurance that pays for treatment and loss due to an accident. It will pay towards medical services, operations, up to 80% of salary and a death benefit to dependents. ACC is for accidents only.
Income Protection is privately paid insurance for accident or illness. It will pay up to 75% of salary. It will not pay for operations, medical bills and death benefits.
There are more subtle difference though, which make a huge difference, that I will go into in this blog.
Why Do I Need Income Protection Then?
Many people don’t see the need for it at all. In fact only 20% of New Zealanders have any income protection at all (one of the lowest in the developed world, even the Aussies have 27%). This is very worrying as the average long term absence is 15 months and four times out of five the time off will be due to sickness. Could you, the reader, afford to not work for 15 months?
The problem is that most people believe that they are invincible, they won’t get ill. If they are going to be off work it will be because of injury not illness. Even though 80% of long term absence is down to illness very few people believe it will be them.
ACC Is Another Kiwi World Beater.
ACC is great, I know I have had need to use it, but it can lull people into a false sense of security.
Remember that ACC will only pay if the claim is purely down to an injury. If there is a hint of a pre-existing or degenerative condition then there may be no claim.This is the main theme in many “ACC bad” stories in the media. Hard working guy is denied a claim as they previously had an injury and the problem is classed as degenerative.
ACC is a world beater, no doubt. That all treatment will be covered in the case of an accident is amazing. Medical bills are met, physios will be covered and medicines made available, is awesome. The 80% of the pre-disability salary being paid until being able to return to work is incredible. Read the small print though and it becomes clear that the income protection will stop upon fitness to attend any suitable job. In practice that means if you are earning $150,000 a year as an IT contractor and you are able, by qualification, to work as a data entry clerk at $50,000 then that is what you will have to do.
That also brings up the point that a person earning $150,000 a year won’t actually get 80% of the salary as the cap is at $97,650. The equivalent of $120,070 annual salary.
Accidental Death Cover, Really?
Some people forget about this. This is cover when a spouse and children receive a share of the pre-death salary until the children are 18 or 21 in full-time education. It’s fantastic but it makes no sense that when people know they have this cover that they still want Life Insurance, but yet think the wage cover is good enough. This can only be put down to the fact that very few people we know die of an accident and most die of a disease.
That there, is the point of this blog. Most deaths are disease related. Cancer, stroke, heart problems are the big ones that everyone knows but there are many others. These diseases usually result in a lot of time off work before the patient either gets better or dies.
So why would anyone want a private Income Protection policy?
As I said 4 out of 5 long term absences are due to illness. Depression, fibromyalgia, back pain, cancer, heart attack, stroke, major elective surgery. None of these would likely be covered by ACC. As most long term illnesses are, on average, for 15 months this leaves people in severe financial trouble.
- if a person is off work long term it is 4 times more likely to be through illness rather than injury
- if they can do any job they are trained for they will be working and off benefit, even if it is at a significantly lower income
- There is a cap of $97,650 on payout or 80% of $120,070
- It is upto the claimant to prove their earnings, which may be difficult for the self-employed.
When this is taken into account then Income Protection seems like a great idea.
What Else Do I Need To Think About?
When I put an Income Protection policy in place there are things that need to be considered.
- There are the technical differences between Agreed Value, Indemnity and Loss of Earnings policies.
- The maximum amounts available and what earnings are taxable and which policies are tax deductible.
- Finally all of them are offset by ACC.
What does offset mean? Simply it means that the amount of an ACC claim is taken off the amount of the Income Protection claim. So if the amount of an ACC claim is $5000 a month and the amount insured privately is $3900 a month then there will be no payment.
Sounds Like The Insurance Company Are Ripping Us Off.
Sounds like a bad deal? Just remember that only 1 absence in 5 is because of accident. Also when ACC say a claimant is fit for a job and stops paying Income Protection will step up. Income protection will pay until you are fit for the job before going off sick. A decent policy will also support an incremental return to work, ACC won’t.
Assuming that it is a good Income Protection policy – there are some terrible policies on the market. There are also common benefits that ACC won’t give you. These include a payment if you have to look after a disabled loved one, a lump sum payout for breaking a bone, additional funds if you are permanently disabled, an automatic annual pay rise linked to inflation, payment into a Kiwisaver and support in returning to work.
What Other Options Are There?
There is another option though, policies that don’t involve offsets. Some policies protect what is spent rather than what is earned and these may not be ‘offset’ by ACC. Sound confusing? It can be, but as with all formula’s it is worked out quickly with a bit of practice. Most of the insurance companies offer this type of policy. It generally has to be combined with other products to cover a full salary and it very much depends on the policy what can and can’t be covered but that is why an expert adviser in your corner is a great idea.
Get in touch with me. After a few questions I can give you a quote for a personalised package. I will marry the best policy with the least offsets. Click here.
One Last Thing.
To further muddy the waters there is the issue of ACC Cover Plus Extra. This is only available for the self employed and non-PAYE directors. This acts as an agreed value policy for the same cover as normal ACC. This will still offset normal Income Protection policies but it will remove the need to prove income to ACC at claim time. There are some other excellent benefits, including the ability to reduce ACC cover and save money.
The trick to this is balancing it all out. It is generally the part of a policy that I will spend the most time on for clients. The average New Zealander will earn at least $5 million over their life, calculating and covering income is a solid base from which to build on.