In New Zealand, there’s often confusion between ACC (Accident Compensation Corporation) and income protection insurance. While both offer financial support if you’re unable to work, they cater to different circumstances. Understanding these differences is crucial for protecting your financial wellbeing, especially if you're self-employed or have unique income circumstances. Let's explore the key distinctions between ACC and income protection, and how each might apply to your situation.
What is ACC?
ACC is a government-run insurance scheme that covers injuries caused by accidents. If you're hurt in an accident, ACC provides compensation for lost wages (up to 80% of your pre-injury income) and covers treatment costs, regardless of whether the accident occurred at work or elsewhere. The scheme extends to all residents and visitors in New Zealand, making it a comprehensive safety net for accidental injuries.
However, there are limitations:
ACC does not cover illnesses or health conditions unrelated to accidents, such as cancer or heart disease.
Coverage is capped - it only pays a percentage of your income, and there are limits to the maximum payout.
ACC payments may not start immediately after the accident, potentially leaving a gap in income.
How Does Income Protection Insurance Work?
Income protection insurance, on the other hand, offers a broader safety net. This type of insurance provides cover if you are unable to work due to illness or injury, not just accidents. It pays a percentage of your income (usually between 50% and 75%) and may continue to pay out for an extended period, depending on your policy terms.
Here’s what makes income protection distinct:
Covers a wide range of conditions: Unlike ACC, income protection is not limited to accidental injuries. It also covers illnesses such as stress, mental health issues, or chronic conditions that prevent you from working.
Customisable terms: You can choose your waiting period (the time before payments start) and the benefit period (how long you receive payments). This flexibility allows for tailored cover based on your needs.
Supplement to ACC: If you have both ACC and income protection, your income protection policy may top up the ACC payments to a higher percentage of your pre-disability income.
Why Consider Both ACC and Income Protection?
For many Kiwis, relying on ACC alone may not provide sufficient financial support, especially if you’re self-employed or earn a high income. Income protection insurance helps fill the gaps that ACC doesn’t cover, such as illnesses, longer recovery times, or providing a top-up to reach a more sustainable income level.
When considering the factors that may lead to a claim, the likelihood of sickness keeping you off work is double the likelihood of an injury. There is a 37% chance of a disability lasting more than 2 months.
Self-employed workers need to be particularly cautious
Self-employed individuals and contractors may find themselves at a disadvantage when it comes to ACC claims. Unlike salaried workers, they may face challenges in proving their income or may not receive compensation based on their most recent earnings. For those who don’t have guaranteed income streams, income protection insurance can offer a critical safety net.
ACC CoverPlus Extra - An Alternative for Self-employed People
ACC offers an optional product called ACC CoverPlus Extra, which allows self-employed people to agree on a pre-determined level of compensation if they need to make a claim. This can be helpful for those with fluctuating incomes. While CoverPlus Extra can provide some peace of mind, it still only applies to accidents. Income protection remains necessary to ensure comprehensive cover for illnesses.
Understanding the Limitations of Each Option
When comparing ACC and income protection, it’s important to recognise their respective limitations:
ACC Limitations:
No cover for non-accident-related illnesses.
Income compensation may not be sufficient, especially for high-income earners.
Potential delays in receiving payments, leading to financial strain.
Income Protection Limitations:
Costs vary based on coverage level and waiting periods, which can affect affordability.
Pre-existing conditions may not be covered without special provisions.
May not cover work-related accidents if ACC is already providing compensation, requiring a top-up policy to supplement ACC benefits.
Which is Right for You?
Determining whether to rely on ACC, income protection insurance, or a combination of both depends on your lifestyle, financial needs, and work situation. For individuals with high-risk hobbies, high income, or self-employment, having both could offer a more secure safety net. Additionally, those who face greater health risks might find income protection crucial to avoid significant financial hardship in the event of an illness.
While ACC is mandatory and automatic for all New Zealand residents, income protection insurance requires more thought. Policies can be tailored to your individual needs, making it a worthwhile consideration to ensure a more comprehensive safety net.
Consider Your Financial Security
Protecting your income means more than just covering medical costs. It’s about maintaining your lifestyle and supporting your family even when you can’t work. Taking the time to review your insurance options and understand what each type of cover offers will better prepare you for life's uncertainties.
If you’re unsure which type of cover suits your needs, exploring income protection insurance options can help provide clarity. Start by learning more about personal risk cover or get started with a personalised insurance review.
The information in this article is general information only and is not intended as financial, medical, health, nutritional, tax, or other advice. It does not take into account any individual’s personal situation or needs. You should consider obtaining professional advice from a financial adviser and/or tax specialist, or medical or health practitioner, in relation to your own circumstances and before acting on this information.
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