Govt. proposed income insurance scheme and what it means for your income protection.

The NZ Government has proposed a new income insurance scheme which would cover workers that are unable to work dues to disability and illness, not just accidents, or if they are made redundant/laid off. Those who currently have income protection or who are looking into it are wondering what this means and what purpose private income protection will serve. I will summarise the proposal and give my thoughts here.

What is the proposed NZ Govt Income Insurance Scheme?

Some of the key points:

• Covers 80% of your salary up to a max of $130,991.

• Initial 4 weeks paid by employer (or scheme if employer is unable to)

• Pays for 6 months after that initial 4 weeks

• Option to extend that payment period to 12 months if you are entering training

• Is to be administered by ACC

• Funded by a 1.39% levy on wages and salaries from workers and employers

• Workers are eligible if have contributed 6 months levies over previous 18 months

I am just taking these at face value and trying to limit my assumptions, but for this article I will assume pre-existing conditions are covered, mental health is covered and that $130,991 limit is taxable income.

What does it mean for my current cover?

If you have an income protection policy in place it probably covers for more and for much longer than this proposal (although likely not for redundancy because it's an expensive add-on). The majority of the income protection policies clients are I am applying for have either a “To Age 65” or “for 5 years” payment period where as the government proposal is only for 6 months. So for long-term protection for serious illness and disability the proposed scheme is likely not enough.

The amount of cover in your current cover may be in excess of the $131,991 limit proposed which is most likely taxable. If you a have an “Agreed Value” income protection policy in place that sum insured will likely be “tax paid”. So a little bit of maths may have to be done to check on that.

*BTW did you know ACC has a similar limit?*

If you earn less than the $130,000 p.a. the scheme could mean you could alter your “wait period”, the amount of time before your policy pays the monthly benefit, to 6 months. This would drastically reduce those premiums.

If you earn a high level of income you will still need income protection with an insurer but your premiums for that cover may be a lot cheaper.

People can take out private income protection why is this important?

As stated above there will still be a need for private income protection. But for many at the moment the cover is too expensive or is not available to them based on their current or past health.

Many of the applications I am submitting to insurers are coming back from with exclusions or being declined. The health component for an application is extensive and if this is a non-issue for the proposed scheme it will mean access to cover for a huge number of workers who do not currently have protection.

Less than 1 in 5 workers in NZ have income insurance, meaning we are horribly underinsured as a nation,in NZ and we still will be even if this scheme is implemented as well due to the short payment period. But as we say in the insurance industry some cover is much better than no cover.

Will this change income insurance in the private sector?

Probably. The products on the market at the moment are already created with ACC in mind. They work with and around any claims paid by ACC. This will likely be no different.

New products will be developed to work around the government scheme, and you could assume it will result in lower premiums, however,. But you will be paying for it through levy’s. It’s a little Houdini slight of hand because you don’t see the levy being is deducted from your pay check, and the amount deducted from your bank account for premiums is less.

What about my assumptions?

I am going to focus on the mental health assumption I made here. There is nothing in the proposal brochure that excludes mental health which is why I made the assumption that it would be included. But this would be a huge advantage as this is a major issue in applying for private insurance for life, health or income cover.

Currently AIA are paying 30% of their income protection claims to those suffering from mental illness. That is huge, and has resulted in exclusions, loadings and deferrals to those applying for income protection. This needs to be covered by the scheme, its value will be greatly diminished if it is not and the government need to clarify this now.

Have your say : https://www.mbie.govt.nz/have-your-say/income-insurance/

What do I think about the proposal?

I like what I see so far. I am one of thosee kiwis that cannot get through the underwriting process for income protection. Before I worked full-time in the insurance industry, I didn’t take risk that seriously and I didn’t have a lot of cover in place. I then had a serious accident overseas badly injuring my leg and ended up going into septicaemic shock. Surviving that I have had a number of ongoing health issues since which means I am too high a risk for an insurer to cover. To most I probably look healthy enough, I even recently ran a half-marathon. All that is to say you probably don’t understand how many Kiwis this could provide cover to who need it. This could go a long way for those not eligible for today’s income insurance, but 6 months pay for a serious health issue will likely be insufficient, especially with a generation which has had to take on massive mortgages to get on the property ladder.

How it is implemented is everything. The Devil is always in the details so I reserve to right to do a 180 and say the scheme sucks if they cut the cover and add a bunch of exclusions and limitations.

Right now, this is only a proposal and is basically a pdf brochure on the MBIE website. Do not make any current decisions based on something that may never be implemented.

https://www.mbie.govt.nz/dmsdocument/18669-a-new-zealand-income-insurance-scheme-summary-booklet