Income protection for a builder with a back history
Hemi, 38, is a self-employed builder in Tauranga. His taxable income last year was $95,000, but it varies between $70,000 and $120,000. He has ACC cover for work injuries. In 2022 he had an L4/L5 disc prolapse treated conservatively; he returned to full duties after six months with no recurrence. He wants income protection to cover his $4,200 monthly mortgage and living costs. An insurer offers a $5,500 monthly benefit, 8-week waiting period, two-year benefit period, and a back-condition exclusion for five years. The adviser's preferred product has a 4-week wait, benefit to age 65, and own-occupation definition for two years, but the insurer will not offer it because of the back history. Hemi has $18,000 in savings and no sick pay. He asks whether he can rely on ACC instead.
1. Assess whether the offered income protection policy is suitable and explain how ACC interacts with the recommendation.
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ACC is not a substitute. It covers personal injury by accident, not illness, and pays up to 80% of lost earnings subject to a cap. A disc prolapse that develops without an accident may not be covered; even an accepted claim would not meet the full mortgage. Hemi's $18,000 savings cover about four months of $4,200 outgoings, so an 8-week wait is affordable, but a two-year benefit period is the weak point. A long-term back condition could last beyond two years. The five-year back exclusion is significant, but it is better than no cover if the policy is priced and structured well.
The adviser should compare a longer benefit period, even with a longer wait or higher premium, against the cheaper two-year product. A 4-week wait with benefit to age 65 is not available because of the history, so the choice is not between the ideal and the offered product; it is between the offered product and no cover. The adviser should ask the insurer whether the exclusion can be reviewed after a symptom-free period, whether the occupation definition is own occupation or any occupation, and whether the benefit is indemnity or agreed value. Hemi should not cancel ACC entitlements or assume ACC will cover a non-accident illness.
2. Explain indemnity versus agreed-value benefits and occupation definitions, and state what you would prioritise for Hemi.
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Indemnity cover reimburses a proportion of actual lost income, usually up to 75%, and requires proof of earnings. Agreed value pays the agreed monthly benefit regardless of current earnings, but it is priced for that certainty and insurers may still require income evidence at application. For Hemi, fluctuating income of $70,000 to $120,000 makes an indemnity policy more flexible, but it can produce a lower payout in a bad year. An agreed-value benefit of $5,500 a month may be attractive, but it must be affordability-tested against $95,000 average income and the insurer's income cap.
The occupation definition matters more than the label. Own-occupation for two years means the insurer pays if he cannot do his own building work; after that, an any-occupation definition may require him to retrain or take other work. For a tradesperson with a back history, the adviser should check whether the own-occupation period is two years or to age 65, and whether a rehabilitation or retraining clause applies. The adviser should also confirm how ACC payments are offset and whether the benefit is reduced by ACC. The recommendation should prioritise a long benefit period and a clear occupation definition over a slightly higher monthly benefit.