17 May

Income Protection VS Life Insurance: Who wins in the money stakes?

If the last year has taught us anything, its expect the unexpected. Or even better, prepare for it. How long could you survive without your income? Three months? Two? One? Recent surveys show most Kiwis have less than $500 in savings , but they dont do anything to protect their most valuable asset – their incomes.

For some reason protecting this asset with income protection insurance is something that most Kiwis never think about. Thats despite the fact that many have insurance to protect other, less vital, assets.

Maybe its because Kiwis think that if anything happens, ACC will provide cover. Unfortunately ACC only pays out if you have had an accident. That means it wont help if you get cancer or degenerative health issues, which could stop you from working temporarily or permanently.

Health and disability allowances are paid by the government, but they are means tested, which means if your partner works you could be out of luck. And as weve seen in 2020, life is full of surprises and most people cant last long without money coming in the door.

The numbers: 🤨 how does income protection compare with life insurance?

To test the numbers when it comes to these two forms of cover, lets look at 2 examples. They show differences in age and income levels significantly influence both payouts and premiums.

👉 Ryan, a 40 year old, non-smoker in a professional occupation.

He has an income of $100,000 and a mortgage of $600,000. He would spend about $50[1] per month for life cover, which would pay out $600,000 in the event of his death. Income Protection Premium is more expensive at about $85[2] per month, but the total payout should Ryan suffer an accident or illness and be unlikely to return to work is far higher at over $2.7 million[3] (75% of income payable to 65). The numbers make it clear that income protection offers much more financial benefit.

Its a slightly different picture for women.

👉 Anna is a 30 year old professional, non-smoking woman.

She has an income of $100,000 and a mortgage of $600,000. Her life cover premium of $600,000 is $32.73 per month. Her Income Protection Premium for a benefit of $75,000pa (75% of $100,000 payable to the age of 65) is $93.09 per month.

This is a higher per month premium payment, but the benefit payout is also much higher. Her total income protection benefit if claimed today would be $3,612,725[1]. This is significantly higher than both the life cover payout and the payout of income protection that we saw Ryan receive.

If Annas earnings increased to $150,000 by 45, before she decided to take out income protection, she would be paying a premium of $288.92 per month to receive $112,500 pa (75% of income) in the event of an accident or illness that prevented her from working.

Her total benefit payout to age 65 would be $2,994,792. $600,000 life cover for the same client would cost $63.65 per month.

🤔 The final word – what the examples teach us.

Although its more expensive than life cover, income protection also offers far more financial benefit if it pays out.

Income protection allows you to protect your other key assets by maintaining a source of income if you cannot continue to work.

Adjustments to your settings can significantly impact both payouts and premiums, so talk to a financial advisor that specialises in insurance for ideas on how you can fit income protection into your budget – you wont regret it.

[1] Life Cover Premium of $600,000 = $51.73pm

[2] Income Protection Premium for benefit of $75,000pa (75% of $100,000*) payable to age 65 = $86.51pm. The maximum insurable amount is 75% of annual income. As per AIA quote software, based on Indemnity Value Income Cover with a 13 week stand down and benefit payable to age 65.

[3] Total Income Protection Benefit if claimed today = $2,715,695.

[4] This is based on Indemnity Value Income Cover with a 13 week stand down and benefit payable to age 65.

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