Could your household cope without your income?

For lots of us, it’s an uncomfortable thought. We rely on our income to pay the bills, cover the groceries, and keep the roof over our heads.

Our incomes are often one of our biggest assets, because the amount that a person can earn over their lifetime can be significant.

That’s why it makes sense to think about protecting it with insurance.

But you might be wondering: Is mortgage protection, or income protection insurance the better way to do it?

Income protection cover

Income protection cover is designed, as the name suggests, to provide insurance for your income. If you are off work due to illness or injury, you could receive regular payments to help cover your bills and keep your household going.

After a standdown period, which you can agree on with your insurer, payments are made until the end of your benefit period – or until you recover sufficiently to return to work, whichever comes first. Benefit periods typically range from two years, five years, or until age 65, depending on your policy.

You usually choose between agreed value cover, where you and the insurer agree at the outset on a payment amount, subject to the maximum allowable percentage of your gross income, or indemnity cover, where claim payments are based on a percentage, often up to 75 percent, of your average income over the previous two or three years before your claim. Agreed value provides certainty, while indemnity is linked to past earnings, which may be less relevant for salaried employees.

Mortgage protection cover

Mortgage protection insurance is a little more targeted and is designed to cover the payments of your mortgage. For many households, this is their most significant cost.

It can also be used to cover rent payments.

Mortgage cover can be taken out based on a percentage of your gross income, or your rent or mortgage payments. Often it can be up to roughly half your gross income, or 115% of your mortgage or rent payments. However, the specific limits can vary depending on the insurer and policy, so it’s a good idea to confirm the exact details with your insurance provider.

What’s the difference?

Income protection may give you a larger payment each month, while mortgage cover is designed to cover mainly that financial commitment.

One of the significant differences in the two types of cover is how they interact with ACC (Accident Compensation Corporation).

If you’re off work due to an injury, you are often able to access some support from ACC.

However when you have income protection policies, the payments you receive from this are usually offset by your ACC payments, which reduces the amount you receive from your insurance policy. The offset is typically based on the total benefit you receive from ACC, including weekly compensation payments.

Mortgage protection cover is not offset in the same way, which means you could receive both ACC payments and your full mortgage protection payments.

Sometimes, the solution might be to have both

It may make sense to opt for both income and mortgage cover.

You could choose to cover your mortgage with insurance that won’t affect any ACC payments, and then “top up” with income protection cover to give you some additional protection on top of that for your other bills. This could be important in situations where you’re off work due to illness.

Your SHARE adviser can help you to work out what mix of cover might be suitable for you.

The right fit

The appropriate solution will depend a lot on your individual circumstances.

If your home loan is your only significant bill, for example, mortgage protection cover may be appropriate. [LP1] However if you have a lot of other outgoings, you may find income protection is more suitable, or a mix of both.

We’re here to help

SHARE’s team of expert advisers are here to answer any questions you may have. If you want the peace of mind of knowing that your household’s expenses are covered, no matter what life brings your way, get in touch with us today.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.