Income protection and life insurance are two very different types of catastrophic insurance. Both are beneficial, and both are necessary, but for very different reasons. Of the two, income protection insurance is probably the most misunderstood. On a general note, the difference between life insurance and income protection insurance can be summed up as life insurance pays out a lump sum if you die and income protection insurance pays out up to 75% of your annual salary if you are unable to work due to illness or injury. Income protection insurance is not life insurance, and life insurance is not income protection insurance. Lets look a bit closer at each and find the reasons they are different.

Life Insurance

There are many reasons why people buy life insurance. The primary reason is to provide a lump sum of cash to a surviving spouse if the other spouse should die. The idea behind life insurance is to provide a replacement for future income or lost salary if the unthinkable should occur. This is one of the reasons why life insurance is often confused with income protection insurance.

Life insurance comes in three basic forms. Those forms are typically called, Term Life Insurance, Whole Life Insurance, and Return of Premium Life Insurance. Each policy type functions in a different way.

Term life insurance covers a specific period of time. For example, a term life policy may cover the next 20 years and then it will expire. If you, the policy holder, should die within the covered period the policy pays out a lump sum. If the policy holder, should live past the coverage period the policy ends without a payout.

Whole life insurance covers the policy holder for all of their life. There is no expiration date for the policy as the name implies, this type of policy covers the holder for their whole life. This type of policy usually has a higher cost associated with it because there is a pay out. The policy will only lapse if the holder fails to make the monthly payment.

Return of Premium Policies are a mixture of both a term life policy and a whole life policy. They work on a specified time period like term life insurance. If the policy hold should outlive the policy coverage period, then the policy returns all of the premiums that were paid for the policy. It may seem kind of odd, but the insurance company has been able to invest the premiums that were paid in for the length of the policy. They have had an interest free loan.

Income Protection Insurance

Income protection insurance is different from life insurance. Even though, some of the philosophies around life insurance may be to recover lost income in case of death, the two policies are different. Income protection is designed to insure your annual salary. It is insurance against the lost of your income. The primary difference between income protection insurance and life insurance is that with income protection policies you the policy holder are still living. Income protection works in conjunction with disability insurance by paying out up to 75% of the annual salary of the policy holder. The pay out occurs only if there has been a qualifying illness or injury that prevents the policy holder from working. This type of insurance is designed to help the policy holder to pay their mortgage, and meet other financial obligations while they recuperate.

Not everyone needs a life insurance policy, but everyone who works should have an income protection policy. Throughout our life, our income is usually our biggest asset. Income protection insurance is used to recover wages if we become sick or injured and can no longer work. An example would be that an injury occurs, and it takes the next three years for the injured party to recover enough to go back to work. An income protection policy will pay 75% of the salary for each of those years. Life insurance for the same scenario will pay nothing.

Income protection policies are sold for specific periods such as one year, ten years or until the holder turns 65 years old. New Zealand changes the tax laws that govern income protection fairly frequently. Choosing the right kind of income protection policy can mean the difference between paying taxes on payouts and not paying taxes on payout. It is best to sit down with a financial advisor who would understand the current laws governing income protection.



(This article and all articles on this site are not to be taken as professional insurance advice and information may not be accurate, for insurance advice please speak to a registered insurance broker. We can connect you with a broker by using the form on this site.)