Redundancy v. Income Protection, and COVID 19

Redundancy Insurance and COVID-19

*Details of products vary between insurers so I speak in general terms here, please check your policy document*

Redundancy and Income Protection insurances are not the same thing. Many Kiwis are confused or surprised that their Income Protection cover doesn’t provide blanket protection against anything that could stop you from receiving income. Income Protection has a specific purpose, to fill the big hole left by ACC which will only cover you for accidents, other injuries and illnesses that will physically prevent you from being able to earn an income.

A case could be made that “Income Protection” is not the best name for these products as it causes a lot of confusion especially during uncertain times. This was also the problem with “Trauma Insurance” which you will notice very few insurers currently offer, it’s because trauma could be perceived as far too broad, so it’s now referred to as “Critical Illness Insurance”. The label of “Disability Income Protection” is starting to be seen more often but I’ll leave it people with a touch more creativity to re-work that one.

LI PLUS DICTIONARY 2020 Edition states:

INCOME PROTECTION from - Personal Risk Product
Provides regular monthly payments to cover your ongoing financial commitments if you face an illness or injury that stops you from working. This is extremely important as your income is likely your most valuable asset. For job loss due to economic impacts see Redundancy Benefit

Redundancy is generally covered as an optional add-on to your income protection policy, with some offering it as a standalone insurance. It has a maximum monthly benefit of $4,000 and is paid for a 6 month period. Most redundancies start paying after the first month from your redundancy claim date until either the six month period is complete, you return to work, you reach 65 (retirement age) or you pass away. The other thing to consider is that there is generally a six month stand-down period on redundancy benefits. That means if you are made redundant within the first six months of cover, you will not be able to make a claim.

So what’s new since COVID-19 changed our world? There are three additional questions insurers want answered :

* Has there been any current impact on your hours and income ?
* Are you an essential service ?
* What is the likely impact on your job and industry going forward ?

The last one is difficult to answer as there is a lot of uncertainty around,  But what insurers are looking at is the potential risk for the person, the business or the industry that would likely lead to a claim. If you, your company or industry is deemed high risk expect insurers to defer your cover for about three months. But this won’t have a major impact on future applications. It’s just about the uncertain nature of the domestic and global economy. One of our providers recently told me redundancy applications have risen by about 200% over the last month... so their cautious nature is understandable.

Each product has it’s purpose and the Redundancy Benefit will allow you to maintain some level of income while you find your way back into the workforce. This add-on can be expensive so you need to consider what your goals are when it comes to getting your insurances in order.

The optimal cover available may not be affordable cover which is were I come in. Analysing your financial position, goals and concerns helps me establish what we need to prioritise in your cover. The recommendations are always going to be unique to you, there is no stencil, no cookie cutter, no one size fits all.

Noho ora mai
Stay well, look after yourself, good bye