Know the true value of income protection

The program would pay 80% of a person's normal income, capped at the current ACC rate.

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The program would pay 80% of a person’s normal income, capped at the current ACC rate.

Katrina Shanks is the Managing Director of Financial Advice New Zealand.

OPINION: The government’s announcement of proposals for a government-backed income protection insurance scheme has sparked much debate, in part because such insurance has long been viewed by many people as an expense they don’t might not need, and therefore do not need to buy.

So what is in the proposed scheme?

It is essentially designed to better protect the more than 100,000 Kiwis who each year are laid off or made redundant, or have to stop working due to a health condition or disability.

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Essentially, it would guarantee them 80% of their income for up to seven months if they lose their job through no fault of their own (income is capped at $130,911 per year).

It includes a four-week notice period and a four-week payment, at 80 per cent of wages, from employers, and an additional six months of financial assistance from the scheme, including retraining or retraining assistance. rehabilitation for a new career at 80 percent of salary or wages for up to 12 months of support.

This would give people the time and financial security to find a good job that matches their skills.

The scheme would be financed by a levy of 1.39% on the payroll of all employers and on the income of all employees.

The program would be managed in the same way as the ACC program.

So what are the barriers to adoption?

These are:

The type of cover being either the indemnity, or the agreed value guarantee, or the loss of earnings.

The period you must wait before the replacement benefit takes effect (this can range from two weeks to two years). The longer the wait, the lower the risk for the insurer, and therefore the lower the premium.

The length of time you will be paid in the event of a claim. It can range from two years up to 70 years. The longer this period, the higher the premium.

If you are insured, is it at standard rates or does it cost you more for your risk. for example occupational hazards.

Private insurance coverage is designed to meet your goals and needs, while the government plan offered is non-variable and would be automatic and you know exactly what your payout would be – 80% of your income, up to this cap of $130,911.

Financial advice New Zealand chief executive Katrina Shanks looks at the government's proposed compulsory unemployment insurance.

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Financial advice New Zealand chief executive Katrina Shanks looks at the government’s proposed compulsory unemployment insurance.

Exact details of the government scheme have yet to be set out, with the government calling for comments on the proposal, but a major factor will be whether there will be an opt-out option for those who prefer to obtain private insurance .

But going with the government program or going private doesn’t change the one overwhelming benefit that both offer: peace of mind that you and your family will be financially OK if the unexpected happens.

I know people who continue to receive their agreed-upon level of income several years after a disability, including one who is still receiving monthly income support payments 11 years after being unable to work due to severe depression. This kept his family safe throughout and allowed his wife to stop working to care for her aging mother.

It is stories like these that show the true value of income protection, whether government or private.

In the words of my adviser, no one has ever had to claim a personal insurance policy never said I wish I hadn’t. In fact, most say it was the best decision they ever made to protect themselves and their families.

Katrina Shanks is the Managing Director of Financial Advice New Zealand.

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