Income Protection Insurance FAQ

Income protection insurance pays a regular monthly benefit — typically up to 75% of your pre-disability income — if you're unable to work due to illness or injury. Unlike a lump sum policy, income protection provides ongoing financial support, replacing the income you'd otherwise lose while you recover.

It's designed to cover your regular living expenses: mortgage or rent, groceries, utilities, school fees, and anything else your income normally covers. The payments continue until you return to work or reach the end of your benefit period.

In New Zealand, income protection insurance is especially important because ACC — while excellent for injuries — does not cover illness. The majority of long-term work absences in NZ are caused by medical conditions, not accidents. Without income protection, a serious illness could mean months or years with little to no income.

When you take out income protection, you choose an amount of cover (up to 75% of your gross income), a waiting period (the time before payments start), and a benefit period (how long payments last if needed).

If you become unable to work due to illness or injury, here's what happens:

1. You wait out your chosen waiting period (4, 8, or 13 weeks)

2. After the waiting period ends, your monthly benefit payments begin

3. Payments continue until you return to work, or until your benefit period ends

Benefit periods vary — typically 2 years, 5 years, to age 65, to age 70. A "to age 70" benefit period provides the most comprehensive protection but costs more.

Payments are subject to benefit offsets — meaning any income you receive from ACC, your employer (sick leave), or other income protection policies is deducted from your benefit. This prevents you from receiving more than your pre-disability income.

Income protection is typically the most expensive type of personal insurance in NZ, reflecting the frequency and duration of claims. Expect to pay between $50 and $300+ per month, depending on your age, income, occupation, health, waiting period, and benefit period.

Key factors that affect the cost:

- Your income level (higher income = more cover needed = higher premium)

- Your occupation (desk-based roles attract lower premiums than physical jobs)

- Waiting period (a 13-week wait is cheaper than 4 weeks)

- Benefit period (to-65 cover costs more than a 2-year benefit period)

- Your age and health

A 35-year-old in an office role earning $80,000 with a 4-week waiting period and to-age-65 benefit might pay around $100–$150/month. The same person with a 13-week wait might pay $60–$90/month.

Some income protection premiums are tax-deductible in NZ (since the benefit is taxable), the after-tax cost is often lower than the headline premium suggests. Indemnity Income insurance policies are generally tax-deductible, agreed value income insurance policies are often non-taxable.

Elan can help you compare options across all major NZ providers.

Yes — ACC alone is not adequate income protection in New Zealand. ACC only covers income loss caused by accidents. If you're unable to work due to illness — cancer, heart disease, diabetes, mental health, or any other medical condition — ACC pays nothing.

Statistically, illness causes far more long-term work absences in NZ than injury. IRD data and insurer statistics consistently show that the majority of income protection claims are for medical conditions, not accidents. Less than 30% of disabilities in New Zealand are the result of an accident or injury.

Even for accident-related incapacity, ACC doesn't necessarily replace your full income. ACC compensation is capped and may not match your actual earnings.

Income protection bridges the gap — covering illness as well as injury, and providing a higher monthly benefit than ACC alone in many cases. Many Kiwis are surprised to discover how significant this gap is until they actually face a health event. The Elan team can show you exactly how the two interact for your specific situation.

Income protection in NZ pays up to 75% of your gross (pre-tax) income at the time of your disability. This is the maximum permitted by most NZ insurers to ensure there remains an incentive to return to work.

If you earn $80,000 per year, the maximum monthly benefit would be around $5,000/month (75% of $80,000 / 12). However, the actual amount you receive may be reduced by benefit offsets — including ACC payments, sick leave from your employer, and any other income protection policies you hold.

Income protection payments in NZ are treated as taxable income (for most indemnity-type policies). This means the 75% is your gross benefit — you'll pay income tax on it at your marginal rate. The net amount you receive depends on your tax position. (Note: premiums are generally tax-deductible, which partially offsets this.)

Some policies also include an indexation benefit, which increases your cover over time in line with inflation or income growth — ensuring your cover doesn't erode in real terms.

For most working New Zealanders — particularly those with a mortgage, dependants, or no substantial savings buffer — income protection is among the most valuable types of insurance you can hold. For most people, you ability to work and earn an income is your biggest asset, it’s not your home, despite what we hear often in NZ.

Your ability to earn an income is your most important financial asset. For a 35-year-old earning $80,000, their remaining working life could represent $2.4 million or more in total future earnings. Income protection insurance exists to protect that precious & delicate asset.

Without it, a prolonged illness could mean:

- Drawing down your KiwiSaver or savings

- Selling assets (including your home)

- Going into debt

- Becoming financially dependent on family

The combination of ACC's illness coverage gap and NZ's limited state welfare for working-age adults makes income protection particularly important here. Elan recommends it as a core part of any protection package for working Kiwis.

Yes — self-employed New Zealanders can get income protection insurance, and it's arguably more important for them than for employees. If you're self-employed, you don't have sick leave, employer contributions, or a guaranteed income if you can't work.

When applying as self-employed, insurers typically base your cover on your net profit from the business (after business expenses, before tax). You'll usually need to provide recent financial accounts to substantiate your income.

One important consideration: if you run a business and your income fluctuates significantly, some insurers may average your income over 2–3 years to determine your maximum benefit. Make sure the benefit level reflects your actual earning capacity.

The Elan team regularly helps self-employed Kiwis — from sole traders to large business owners — structure income protection that genuinely reflects their situation.

Sometimes, it depends on which type of income protection insurance you decided on. Generally, agreed value policies are non-taxable, whilst indemnity policies are taxable.

For indemnity income insurance policies, this means if you pay $150/month in premiums, you can usually claim that as a tax deduction. At a 33% tax rate, the after-tax cost of the premium is effectively $100/month — making income protection more affordable than the headline premium suggests.

Note: This deductibility applies to income protection insurance only. Life insurance, trauma insurance, and TPD premiums are generally not tax deductible for personal policies.

For self-employed people, this deduction can be particularly meaningful. Keep good records of your premiums and discuss the deductibility with your accountant. If you have questions about how this works, the Elan team can point you in the right direction.

Sometimes, it depends on which type of income protection insurance you decided on. Generally, agreed value policies are non-taxable, whilst indemnity policies are taxable.

For indemnity policies — income protection benefit payments are taxable in New Zealand, in the same way as regular employment income. This is why the premiums are tax deductible: the tax treatment is consistent in both directions.

When you receive income protection payments, your insurer will deduct withholding tax (if applicable), and you'll need to declare the income in your tax return. The tax you pay will depend on your marginal tax rate.

In practice, most people on income protection are not earning other income at the same time, so they may fall into a lower tax bracket than when fully employed. This can mean the net benefit is relatively close to what you'd expect.

It's worth factoring the taxable nature of payments into your planning. When deciding how much cover to take out, make sure the benefit level (after tax) is sufficient to cover your actual living expenses.

ACC (the Accident Compensation Corporation) provides no-fault compensation for injuries caused by accidents — anywhere in the world, for New Zealand residents. Income protection insurance provides a monthly benefit if you're unable to work due to illness or injury.

The critical difference: ACC only covers accidents. Illness is not covered by ACC.

Additionally:

- ACC pays approximately 80% of your income for the first year, then reduces; income protection can pay up to 75% until age 65

- ACC covers injuries from accidents; income protection covers any cause of incapacity including illness and mental health

- Income protection benefit periods can run until age 65; ACC does not have this long-term guarantee

In practice, income protection and ACC work alongside each other. If you're injured, ACC pays first and any income protection benefit is reduced by the ACC payment (due to benefit offsets). But for illness — the more common cause of long-term absence — income protection is your only financial lifeline.

No — standard income protection policies in New Zealand do not cover redundancy or voluntary unemployment. Income protection only covers inability to work caused by illness or injury.

However, some NZ insurers offer an optional redundancy benefit that can be added to an income protection policy for an additional premium. This provides a monthly payment (typically for up to 6 months) if you're made genuinely redundant through no fault of your own.

If redundancy is a concern — particularly in a volatile employment market — Elan can let you know which NZ insurers offer this add-on and whether it represents good value in your situation. Elan also offers standalone Redundancy Insurance.

The duration of income protection payments depends on the benefit period you chose when setting up your policy. Common benefit periods offered in NZ are:

- 2-year benefit period: payments stop after 2 years of continuous disability
- 5-year benefit period: payments stop after 5 years
- To age 65: payments continue for as long as you remain unable to work, until you turn 65
- To age 70: payments continue for as long as you remain unable to work, until you turn 70

A ‘to-age-70’ benefit period is the most comprehensive and valuable option — particularly for younger people who could face decades of income loss from a serious condition. It also costs more than a limited benefit period.

For most Kiwis with significant financial obligations, a ‘to-age-65’ benefit period is recommended. A 2-year benefit might seem adequate, but many long-term illnesses — cancer recovery, mental health conditions, serious injury — can keep people off work for far longer, or even permanently.

The benefit period is the maximum length of time your income protection insurance will pay out for a single claim. It's one of the most important choices you make when setting up your policy.

If your policy has a 2-year benefit period and you're unable to work for 3 years due to illness, payments stop after the first 2 years. If your policy runs to age 65, payments continue until you can return to work or until you turn 65 — whichever comes first.

The benefit period affects your premium: to-age-65 cover costs more than a 2-year benefit, but provides far greater protection for serious long-term conditions.

Imagine if you’re 35 years old and diagnosed with a degenerative illness that prevents you from working and it’s unlikely to get better (there are many conditions like this). If you decided to save money and only purchase a 2-year benefit period for your income protection insurance, financial assistance would completely stop at age 37 and you’d be left with an inability to work and no financial assistance for 28 years (assuming NZ retirement age stays at age 65). If you have a bit more budget, we highly recommend setting up your policy with a ‘to age 65’ or ‘to age 70’ benefit period. 

When choosing a benefit period, consider your financial resilience. Could you manage after 2 years of income protection payments without further support? If not, a longer benefit period may be essential.

Yes, in many cases — though the terms of your cover may be adjusted. Pre-existing conditions are assessed individually, and the outcome depends on the nature and severity of the condition. Income protection is quite a ‘delicate’ benefit, so pre-existing conditions can often result in exclusions.

Common outcomes include:

- Standard acceptance with no changes

- Premium loading (paying more to account for the additional risk)

- A specific exclusion for the pre-existing condition (e.g. mental health excluded for a history of anxiety)

- Decline in cases of very severe or unstable conditions, or simply many individual conditions

Full and honest disclosure is essential. Non-disclosure of a pre-existing condition is the most common reason income protection claims are denied in NZ — and it's a problem entirely within your control.

Different NZ insurers assess the same conditions with different levels of flexibility. Working with an independent broker like Elan means your application goes to the insurer most likely to offer competitive and fair terms for your health profile.

Most occupations qualify for income protection in NZ, but some high-risk roles are considered uninsurable by standard providers:

Commonly excluded occupations include: armed forces and military, police officers, prison guards, firefighters, coal miners, commercial divers, some aviation roles, and certain manual/physical labour trades.

For physically demanding occupations that don't fall into excluded categories, insurers often classify them into occupation classes (ranging from Class 1 desk-based executive to Class 4 heavy manual), with higher-risk classes attracting higher premiums and sometimes more restrictive policy terms.

If your occupation is in a higher-risk category, it's worth working with a broker who can assess all NZ providers to find the most competitive option for your role. Elan regularly helps people in trades, construction, and other physical occupations find suitable cover.

It’s very common for those in the trades to start their working life ‘on the tools’ paying for income insurance under an occupation class of 3 or 4 (more expensive). Often, these individuals can be promoted into a site manager or office based role and they do not update their insurance. It’s important to keep your occupation class up to date to ensure you aren’t overpaying premiums.

If you return to work while receiving income protection payments, your benefit will be adjusted or stopped depending on your level of recovery.

If you return to full capacity and earn 75% or more of your pre-disability income, your income protection payments stop. If you return to work at a reduced capacity — earning less than 75% of your previous income — you may receive a partial disability benefit, which tops up your reduced income to a proportion of your previous level.

This partial benefit is designed to support a gradual return to work rather than creating a cliff edge where returning to work part-time leaves you financially worse off. The exact calculation depends on your policy terms.

Staying in close contact with your broker during a claim is important. Elan supports clients through the entire claims process and can help you understand how returning to work affects your benefit.

Benefit offsets are amounts deducted from your income protection payment because you're already receiving income from another source due to the same illness or injury.

Common offsets include:

- ACC payments (the most common offset in NZ)

- Sick leave payments from your employer

- Other income protection policies covering the same event

Example: if your income protection benefit is $5,000/month and you're receiving $2,000/month from ACC for the same condition, your income protection will pay $3,000 — topping up your total to $5,000.

Benefit offsets are standard across NZ income protection policies and are designed to prevent you from receiving more than your actual pre-disability income. The key is ensuring your income protection benefit is set high enough that even after offsets, you receive adequate income.

Yes — most NZ income protection policies cover mental health conditions, including anxiety, depression, burnout, and stress-related conditions, provided they meet the policy's definition of total or partial disability.

Mental health claims are among the fastest-growing categories in NZ income protection. This makes it an increasingly important part of the cover.

However, some policies have specific definitions, exclusions, or shorter benefit periods for certain mental health conditions. Some older or lower-cost policies may limit mental health claims to a 2-year benefit period even if the policy otherwise runs to age 65.

If mental health cover is important to you — particularly if you work in a high-stress environment — it's worth checking the specific mental health provisions in any policy you're considering. Elan can compare policies with strong mental health coverage across all major NZ insurers.

A better option is likely ‘household expenses cover’ or ‘mortgage protection insurance’ rather than income protection insurance as these other policies do not require personal income to qualify.

Even if you do not earn a formal salary, you provide significant economic value through childcare, household management, and domestic support. Some NZ income protection policies allow homemakers to insure the cost of replacing those services if they were injured or ill and unable to perform them. The cover is typically based on the cost of equivalent domestic and childcare services, not a traditional income.

For sole traders: your income protection should be based on your net business income (gross revenue minus business expenses). You'll generally need to provide recent financial accounts to support your application. Because sole traders have no sick leave or employer safety net, income protection is especially critical — a prolonged illness could mean the business stops generating income entirely.

For company directors: your income protection should be based on your personal drawings from the company, this can often be called ‘drawings’ or ‘shareholder salary’ on your company profit/loss statement. You'll generally need to provide recent financial accounts to support your application. Because company owners generally have no sick leave or employer safety net, income protection is especially critical — a prolonged illness could mean the business stops generating income entirely.