Loss of Income Insurance NZ: How It Works and Who Needs It
Most New Zealanders assume they are covered if they cannot work. ACC will take care of it, right? It is the most expensive assumption QuoteHub corrects.
Not quite. ACC covers accidents, not illness, and most income protection claims are for causes ACC does not pay. On Partners Life's published Income Cover claims, accident and injury account for 42%, so the majority are illness (Partners Life claims brochure, claims assessed 1 April 2024 to 31 March 2025). Cancer, heart disease, mental health conditions, chronic pain. None of these are covered by ACC. If a serious illness stops you from earning, ACC will not pay you a cent.
That is where loss of income insurance comes in. It is the safety net that fills the gap ACC leaves open, and for many Kiwis it is the most important form of personal insurance they can own.
This guide explains what loss of income insurance is, how it works in the New Zealand context, who needs it most, and how to choose the right policy.
What Is Loss of Income Insurance?
Loss of income insurance is the same product as income protection insurance, with both names used interchangeably across the New Zealand market. Cover pays a regular monthly benefit of typically up to 75% of pre-disability income when illness or injury stops you working, continuing until you return to work or the benefit period ends.
It pays you a regular monthly benefit (typically up to 75% of your pre-disability income) if you are unable to work due to illness or injury. The benefit continues until you can return to work, or until the end of your chosen benefit period, whichever comes first.
The key features of a standard policy include:
- Monthly benefit: Up to 75% of your gross pre-disability income, paid tax-free in most cases.
- Waiting period: The number of weeks you must be unable to work before payments begin (commonly 4, 8, or 13 weeks).
- Benefit period: How long payments continue if you remain unable to work (options range from 2 years to age 65 or 70).
- Agreed value or indemnity: Two different methods of calculating your benefit amount (explained in detail below).
- Partial disability benefit: Reduced payments if you can return to work in a limited capacity.
Unlike redundancy cover, loss of income insurance is not triggered by losing your job. It is triggered by a medical condition that prevents you from doing your job. This is an important distinction.
The ACC Gap: Why Loss of Income Insurance Matters
New Zealand's ACC leaves a gap because it provides no-fault cover for accidents only, paying up to 80% of pre-injury earnings, capped at approximately $2,350 per week before tax, while covering no illness at all. Cancer, heart attack, severe depression and chronic back pain with no accident cause fall outside ACC entirely, and loss of income insurance covers them.
However, ACC has a significant limitation. It only covers injuries caused by accidents. It does not cover illness or disease.
Consider the following comparison:
| Scenario | ACC Coverage | Loss of Income Insurance |
|---|---|---|
| You break your leg falling off a ladder | Covered. 80% of earnings paid. | Also covered, after waiting period. |
| You are diagnosed with cancer and cannot work for 12 months | Not covered. | Covered. Up to 75% of income paid monthly. |
| You develop severe depression and are unable to work | Not covered. | Covered, subject to policy terms. |
| You suffer a heart attack and need 6 months off work | Not covered. | Covered. Up to 75% of income paid monthly. |
| You injure your back in a car accident | Covered by ACC. | Also covered, after waiting period. |
| You develop chronic back pain with no specific accident cause | Not covered. | Covered, subject to policy terms. |
The pattern is clear. For the majority of conditions that force working-age New Zealanders off work for extended periods, ACC provides no income replacement at all.
Financial Services Council NZ research confirms that 1 in 7 New Zealand households have experienced a serious illness that caused three or more months of lost work in the past five years. Most of those households had no private cover to fall back on.
Who Needs Loss of Income Insurance Most?
Loss of income insurance matters most to self-employed Kiwis and contractors with no sick leave, tradies and physical workers, mortgage holders, single-income households and high earners. Financial Services Council NZ research found 1 in 7 New Zealand households have had a serious illness cause three or more months of lost work in the past five years.
Self-Employed and Contractors
If you are self-employed, there is no employer to provide sick leave or redundancy pay. Your income stops the moment you stop working. For sole traders, freelancers, and contractors, loss of income insurance is not optional. It is the only realistic safety net available.
Self-employed Kiwis can choose agreed value policies, which lock in a benefit amount at application based on your earnings history. This is particularly valuable for those with variable incomes.
Tradies and Physical Workers
Tradespeople face a double risk. Their occupations carry a higher injury rate (covered by ACC), but they are equally exposed to illness (not covered by ACC). A builder who develops severe arthritis or a plumber diagnosed with cancer faces the same income loss as anyone else, but their ability to return to modified desk duties is limited.
Premiums are higher for physical occupations, but the need is proportionally greater.
Mortgage Holders
If you have a mortgage, your largest financial obligation continues regardless of your health. Loss of income insurance ensures your mortgage payments are met if illness stops you from working. Without it, a prolonged illness could mean losing your home.
Some insurers offer specific Mortgage, Income or Rent Cover (MIRC) policies tailored to this need, with benefits directed specifically toward housing costs.
Single-Income Households
When one income supports an entire family, the consequences of losing that income are severe. There is no second earner to absorb the shortfall. For single-income families, loss of income insurance provides the financial buffer that a second income would otherwise provide.
High-Income Earners
The higher your income, the larger the gap between what you earn and what government support provides. A Kiwi earning $150,000 per year who becomes seriously ill faces a dramatic lifestyle and financial adjustment with no ACC support. Loss of income insurance bridges that gap.
How Claims Work
A loss of income claim in New Zealand runs through six stages, starting with notifying your insurer or adviser and providing a medical certificate from your treating doctor. Payments begin once the chosen waiting period of 4, 8 or 13 weeks expires, continue subject to periodic medical review, and stop when you return to work. Understanding the claims process early removes uncertainty.
Step 1: Notify Your Insurer
Contact your insurer (or your financial adviser) as soon as you know you will be unable to work for an extended period. Early notification allows the insurer to begin processing your claim promptly.
Step 2: Provide Medical Evidence
Your insurer will require a medical certificate from your treating doctor confirming your diagnosis and inability to work. Most insurers have their own claim forms that your doctor will need to complete.
Step 3: Waiting Period
Your chosen waiting period (4, 8, or 13 weeks) must pass before benefit payments begin. During this time, you rely on sick leave, savings, or other resources.
Step 4: Benefit Payments Begin
Once the waiting period expires and your claim is accepted, monthly payments begin. These continue for as long as you remain unable to work, up to the end of your benefit period.
Step 5: Ongoing Assessment
Your insurer may request periodic medical updates to confirm your continued inability to work. If you can return to work in a limited capacity, partial disability benefits may apply.
Step 6: Return to Work
When you are able to return to work, benefit payments cease. Many policies include rehabilitation support and graduated return-to-work provisions to help you transition back.
Cost Factors: What Affects Your Premium?
Seven factors drive a loss of income premium in New Zealand: age, occupation class, waiting period, benefit period, stepped or level premium structure, smoking status and health history. Extending the waiting period from 4 weeks to 13 weeks is the single most effective reduction, cutting the premium by 30% or more, and a benefit period to age 65 costs roughly double a 2-year term.
| Factor | Lower Premium | Higher Premium |
|---|---|---|
| Age | Under 30: the lowest rates on the schedule | 45 to 60: materially higher, and climbing each year on a stepped structure |
| Occupation | Office worker ($100k salary, 2-year benefit): the lowest occupation class | Tradie ($100k salary, 2-year benefit): manual classes attract a substantial loading |
| Waiting period | 13 weeks: saves 30%+ vs 4-week wait | 4 weeks: highest premium |
| Benefit period | 2 years: lowest premium | To age 65: approximately double the 2-year cost |
| Premium structure | Stepped: starts lower and increases every year with age | Level: starts higher but stays fixed for the term |
| Smoking status | Non-smoker: standard rates | Smoker: significant loading applied |
| Health history | Clean health history: standard rates | Pre-existing conditions: loadings or exclusions may apply |
As a general guide, the spread within a single occupation is wide, because the waiting period, benefit period and premium structure each move the price substantially for the same person and the same income. Between occupations the gap is wider still: a tradie earning $100,000 pays materially more than an office worker on the same income for identical cover, because occupation class is the largest single loading on an income protection premium.
The single most effective way to reduce premiums is to extend your waiting period. Moving from a 4-week to a 13-week waiting period can reduce your premium by 30% or more. This approach works well if you have an emergency fund of $3,000 to $4,000 to cover the gap, or if your employer provides paid sick leave for the initial weeks.
Agreed Value vs Indemnity: A Critical Choice
Agreed value locks your benefit amount in at application, while indemnity calculates it from your actual income in the 12 months before a claim and pays up to 75% of that figure. Agreed value costs typically 15% to 25% more, and suits self-employed New Zealanders with fluctuating income; salaried employees with stable earnings often find indemnity sufficient.
Agreed Value
Your benefit amount is agreed and locked in at the time you take out the policy, based on your income at that point. At claim time, the insurer pays the agreed amount regardless of what you were earning immediately before becoming ill.
Advantages: Certainty of benefit amount. Ideal for self-employed Kiwis with fluctuating incomes. No need to prove current income at claim time.
Disadvantages: Higher premiums (typically 15% to 25% more than indemnity). Requires income evidence at application.
Indemnity
Your benefit is calculated based on your actual income in the 12 months before your claim. The insurer assesses your earnings at claim time and pays up to 75% of that figure.
Advantages: Lower premiums. Suitable for employees with stable, documented incomes.
Disadvantages: If your income has dropped before your claim (for example, you reduced hours due to early symptoms), your benefit will be lower. Requires income proof at claim time.
Our recommendation: Self-employed Kiwis and those with variable incomes should strongly consider agreed value. The premium difference is worth the certainty. Salaried employees with stable incomes may find indemnity sufficient.
Choosing Your Waiting Period and Benefit Period
Waiting period and benefit period have the biggest impact on both premium and protection. A 4-week wait gives maximum protection at the highest cost, 8 weeks is a common middle ground, and 13 weeks is cheapest but needs a solid emergency fund. For most New Zealanders a benefit period of at least 5 years provides a meaningful safety net.
Waiting Period
The waiting period is the gap between becoming unable to work and your first benefit payment.
- 4 weeks: Maximum protection, highest premium. Best if you have limited savings or no employer sick leave.
- 8 weeks: A common middle ground. Suits those with some savings or partial sick leave entitlements.
- 13 weeks: Lowest premium. Requires a solid emergency fund or extended sick leave provisions. Often the best value for employees with good sick leave.
Benefit Period
The benefit period determines how long payments continue if you remain unable to work.
- 2 years: Covers most claims (the majority of income protection claims resolve within two years). Lowest premium option.
- 5 years: Provides additional security for more serious conditions. Moderate premium increase over 2-year cover.
- To age 65: Full protection until retirement. The most comprehensive option, but premiums are roughly double the 2-year equivalent.
For most New Zealanders, a benefit period of at least 5 years provides a meaningful safety net. A 2-year benefit period is better than no cover at all, but it leaves you exposed if a serious illness (such as cancer treatment and recovery) extends beyond 24 months.
Practical Examples
Two New Zealand examples show how policy choices play out. A self-employed designer on agreed value cover kept her original insured income during 14 months of cancer treatment, even though her earnings had fallen the year before. An employed electrician on a 13-week wait and 5-year benefit period was paid for the last 5 months of an 8-month back injury.
Example 1: Sarah, Self-Employed Graphic Designer
Sarah is 38, earns approximately $95,000 per year, and has a mortgage of $420,000. She is self-employed with no sick leave.
She chooses an agreed value policy with a 4-week waiting period and a benefit period to age 65. Her monthly benefit is locked in at $5,900 per month (75% of her income at application).
Three years later, Sarah is diagnosed with breast cancer. Her income had dropped to $80,000 in the year before diagnosis due to reduced work capacity. Because she chose agreed value, her benefit is still based on her original $95,000 income. She receives $5,900 per month throughout her 14-month treatment and recovery period.
Total benefit received: approximately $82,600. Her mortgage payments and living costs were covered throughout.
Example 2: Mark, Employed Electrician
Mark is 44, earns $105,000 per year, and has a mortgage of $380,000. His employer provides 10 days of sick leave per year.
He chooses an indemnity policy with a 13-week waiting period and a 5-year benefit period. The long waiting period is what makes the cover affordable on a manual occupation class.
Mark suffers a serious back injury at home (not work-related, so ACC does not cover it). He is unable to work for 8 months. After the 13-week waiting period (during which he uses sick leave and savings), he receives approximately $6,500 per month for the remaining 5 months of his recovery.
Total benefit received: approximately $32,500. Without the policy, Mark would have exhausted his savings within the first three months.
Frequently Asked Questions
Is loss of income insurance the same as income protection?
Yes. The two terms are interchangeable. Different insurers and advisers use different names, but the product, coverage, and policy structure are identical. Both pay a monthly benefit if you are unable to work due to illness or injury.
Does ACC cover illness?
No. ACC only covers injuries caused by accidents. Illness, disease, and medical conditions that are not the result of an accident are not covered by ACC. This includes cancer, heart disease, stroke, mental health conditions, and chronic diseases. Loss of income insurance is specifically designed to fill this gap.
How much does loss of income insurance cost in NZ?
Premiums vary widely based on age, occupation, waiting period, and benefit period. Occupation class is the largest single factor: a tradie earning $100,000 pays materially more than an office worker on the same income for identical cover. Extending your waiting period from 4 weeks to 13 weeks can reduce premiums by 30% or more, and taking a 2-year benefit period instead of cover to age 65 roughly halves the cost. An adviser can quote your exact configuration across insurers, which is the only way to get your own figure.
Can I get loss of income insurance if I am self-employed?
Yes. Self-employed Kiwis are eligible for loss of income insurance and are among those who need it most. Agreed value policies are particularly well suited to self-employed individuals, as the benefit amount is locked in at application and does not depend on proving your income at the time of a claim.
What is the difference between agreed value and indemnity?
Agreed value locks in your benefit amount when you take out the policy. Indemnity calculates your benefit based on your actual income in the 12 months before your claim. Agreed value costs more but provides certainty. Indemnity is cheaper but carries the risk of a lower benefit if your income has decreased.
How long do I have to wait before receiving payments?
Your waiting period (chosen at application) determines this. Common options are 4 weeks, 8 weeks, or 13 weeks. A longer waiting period reduces your premium but means a longer gap before payments begin. Most advisers recommend choosing the longest waiting period you can comfortably self-fund.
Does loss of income insurance cover redundancy?
No. Standard loss of income insurance covers inability to work due to illness or injury, not job loss. Some insurers offer separate redundancy cover as an add-on or standalone product, but this is a different type of insurance.
Are benefit payments taxable?
In most cases, loss of income insurance benefits paid to individuals are not subject to income tax in New Zealand. However, if your employer pays the premiums and claims the cost as a business expense, the benefit payments may be taxable. Speak with your accountant or financial adviser about your specific situation.
How to Get the Right Policy
The most effective way to find the right loss of income insurance policy is to speak with a licensed financial adviser who can compare options across all major NZ insurers.
Key steps:
- Calculate your essential monthly expenses. Include mortgage or rent, food, utilities, insurance premiums, and other non-negotiable costs.
- Determine your ideal benefit amount. Aim for 75% of your gross income, or enough to cover your essential expenses.
- Choose your waiting period. Match it to your emergency fund and sick leave entitlements.
- Choose your benefit period. At least 2 years. 5 years or to age 65 if your budget allows.
- Decide between agreed value and indemnity. Based on your employment type and income stability.
- Compare across insurers. Premiums, claims acceptance rates, and policy features vary significantly.
References
- ACC New Zealand, What we cover
- Financial Markets Authority (FMA), Insurance guidance
- Sorted.org.nz, Income protection
- Insurance & Financial Services Ombudsman (IFSO)
- Stats NZ, Income and earnings
- Cancer Society of New Zealand
- Heart Foundation NZ
- Mental Health Foundation NZ
- Financial Services Council New Zealand. Insurance Claims Statistics Report 2024-25.
- ACC. What We Cover. acc.co.nz.
- Partners Life, AIA, Asteron Life, Fidelity Life. Income Protection Product Disclosure Statements, 2025-2026.
- Ministry of Business, Innovation and Employment. New Zealand Income Insurance Scheme Consultation Document.
- Workplace Savings NZ. Financial Resilience of New Zealand Households, 2024.
- Rating scales as published by the agencies themselves: Guide to Best’s Financial Strength Ratings, A.M. Best and Rating definitions, Fitch Ratings, both retrieved 9 September 2026. New Zealand insurers publish their own current grade; the licensed entities are listed on the Reserve Bank register of licensed insurers.
Disclaimer
The information in this article is general in nature and does not constitute personalised financial advice. It is intended to help you understand loss of income insurance in New Zealand and should not be relied upon as a substitute for advice from a licensed financial adviser.
QuoteHub connects New Zealanders with licensed financial advisers. Financial advice is provided by Craig Smith Business Services Limited, trading as Smiths Insurance & KiwiSaver, a licensed Financial Advice Provider (FSP712931). QuoteHub is a trading name. Advisers in our network operate under a licensed Financial Advice Provider and are bound by their own disclosure obligations.
Insurance needs vary by individual. Cover amounts, premiums, and policy terms depend on your personal circumstances including age, health, occupation, and income. We recommend obtaining personalised advice before making any insurance decisions.
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