Author Katrina Shanks, CEO Financial Advice NZ Article originally published in Stuff.co.nz.
The Government’s announcement of proposals for a Government-backed income-protection insurance scheme has sparked a lot of debate, partly because such insurance has been long regarded by many people as an expense they might not need, therefore do not require to purchase.
So, what’s in the proposed scheme?
It’s basically designed to better protect the more than 100,000 Kiwis who each year are made redundant or laid off, or have to stop working because of a health condition or disability.
In essence, it would guarantee them 80 per cent 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 a year).
It comprises a four-week notice period and a four-week payment, at 80 per cent of salary, from employers, and a further six months of financial support from the scheme, including support for re-training or rehabilitation for a new career at 80 per cent of wages or salary for up to 12 months of support.
This would give people time and financial security to find a good job that matches their skills.
The scheme would be funded by a levy of 1.39% on the wage bill of all employers as well as on the income of all wage and salary earners.
The scheme would be run the same way as the ACC scheme works.
So, what are the barriers to uptake?
The type of cover being either indemnity, agreed value cover or loss of earnings.
The period you have to wait before the replacement benefit kicks in (this could be between two weeks and two years). The longer the wait the lower the risk to the insurer, so the lower the premium.
The length of time you will be paid in the event of a claim. This could be from two years through to age 70. The longer this period, the higher the premium.
If you are insured, is it at standard rates or is it costing you more for your risks. e.g occupational hazards.
Private insurance cover is designed to meet your goals and needs while the proposed government scheme is not variable and would be automatic and you know exactly what your pay-out would be – 80 per cent of your income, up to that $130,911 income benefit ceiling.
The exact details of the government scheme have yet to be worked out, with the Government calling for feedback on the proposal, but one important factor will be if there will be an opt-out for those who would rather obtain private insurance.
But going with the government scheme or privately doesn’t change the one overwhelming benefit both offer: peace of mind that you and your family will be financially OK if the unexpected does happen.
I know of people who continue to receive their agreed level of income several years after a disability, including one who is still receiving monthly income support payments 11 years after not being able to work due to severe depression. It’s kept his family secure for all that time and has enabled his wife to stop work to care for her ageing mother.
It’s stories like these that show the true value of income protection, be it Government or private.
In the words of my adviser – nobody who has ever had to claim on a personal insurance policy has ever said I wish I didn’t have it. In fact, most say it was the best decision they ever made to protect themselves and their family.