Are You Covered?

Most of us working in the industry understand that we operate as Independent Contractors and as such there’s nothing like sick-pay if we can’t work. That’s why you’ve got Income Protection insurance, right?

So how would you feel if that insurance doesn’t amount to much if you actually had to make a claim?

In mid-September I took a prat-fall off my mountain-bike and broke my hip. Yes, ouch.

I don’t even have a good ‘war-story’ to tell about the accident, but needless to say, shit happens, and often when you’re not really thinking about it - like when you’re taking the kids for a ride around the block.

So, in a split second my life was disrupted … 3 nights in hospital, a nice bit of titanium hardware, some pretty fun painkillers, and a new zipper down the side of my thigh. Oh, yes … and $15,000 lost income from confirmed jobs that I had to cancel, and unknown others that may or may not have happened.

Luckily, our two kids are old enough to be in school, my wife works part-time and mostly from home, ACC covers all, and I had the foresight to take out Disability Income Protection Insurance with Sovereign seven years ago when our first child was born.

Or so I thought.

Let me say right now that ACC was (is) fantastic, as were all the medical people I’ve had to see. I saw the bill for those 3 days … my little trip by ambulance (it was right around the corner from hospital) cost $450. X-Rays, morphine etc in ED, then admitted to the Ortho ward (after the specialist had to be called in to see me on Saturday night), surgery, anaesthetist and theatre fees, two more days of hospital care and then all the follow-ups … the direct cost to ACC of my little prat-fall was in excess of $12,000.

All that was taken care of (including the paperwork) pretty much automatically.

The following week I had to go see my new “Case Manager” at ACC. A formality really, I guess - they just have to sight you and make sure you’re not pulling a scam … They even paid for a taxi to get there and back.

The painful part is how much ACC will pay as a weekly benefit to help you pay the bills.

We all get paid on invoice, which to us is “gross income” … after our accountants do their thing (deduct GST, expenses, the phone, the car, the home office, etc, etc) the end result is the amount we pay taxes on … our “Net Income.” Even if we run a Limited Liability Company (as I do), the process is the same, in that the end amount … what we pay income tax on … is regarded as our individual income.

This amount is what the ACC premium is based on, and so also is the amount they’ll pay out (as a weekly benefit) in the event of an accident.

Sorry, 80% of that amount is what they’ll pay out … AND less income tax. It’s regarded as ‘wages,’ so has PAYE deducted.

So, say you bill jobs around $50,000 a year (your ‘gross’ earnings) … If your accountant is any good, they’ll get that figure down to about $25,000 taxable income, your ACC bill will be around six to seven hundred, and if you have an accident, they’ll pay into your account about $350 a week.

Is that enough for you to live on?

I knew all that, and have no issue with it (we pay a premium based on a figure, and get that figure if we have an accident). Which is why we have Income Protection Insurance.

EXCEPT THAT … my $50,000 coverage is nothing like that!

First: The $50,000 is that maximum they will actually pay out, not the amount they will pay out.

Second: I have to provide proof of my income … and

That proof is (you guessed it) my Net Taxable Income as declared to IRD!!

Third: They’ll pay out only 75% of that proven income.

And Fourth: They’ll deduct any benefits paid out by ACC (or any other Insurer) first!!

So my $50,000 coverage … for which I’m paying $110 a month … will only pay a benefit to me of $360 a month!!

However, they will waive my premiums for the duration - which is kind of them.

Lovely isn’t it: the very thing you insure for happens, and you find that your insurance is not what you thought it was.

In Sovereign’s defense, it’s all there in black-and-white in the policy (albeit way down in the small text); they’ve been very easy to talk to and haven’t made anything difficult at all, and most importantly, their insurance is sold by other parties (consultants, brokers, advisors) and not by Sovereign. So we got very bad advice at the beginning (from Stone and Associates) and secured a policy that didn’t in fact cover us for what we needed (or indeed, thought we were getting).

Income Protection Insurance is, I believe, similar across all the big companies … it’s either “Indemnity” or “Agreed Cover” Insurance which affects the amount of premium you pay … But for both you have to prove your taxable income - either up-front for Agreed, or after the disability for Indemnity. You can’t take out a $200,000 policy and then 6 months later break a leg and expect that sort of income (unless you pay tax on that amount).

You’re also covered for other unforeseen non-accidental events that stop you from earning an income (like a heart attack, or cancer, or a burst appendix, or gall-stone removal) that ACC won’t cover … and possibly for 5-10 years or more (whereas ACC seem to want to get rid of you after 2 years).

And on a positive note, Sovereign also calculate your income differently to ACC, in that they’ll take your “best consecutive 12 month earnings period over the 36 months prior to the disability” … i.e. allowing for large swings in earnings from self-employed, they’ll use your highest earnings over the past 3 years.

But, ultimately, is Income Protection, or Disability Insurance, the right thing for us?

It’s damn expensive, and in my case at least, not the right policy.

ACC offer something called “CoverPlus Extra,” which in retrospect I should have had. Rather than having coverage tied to your previous year’s taxable income, you nominate the amount you want to be covered for (and pay the premium accordingly). If I’d had my $50,000 coverage there, I would have received $962 (less tax) from the first week after my accident, and not been in the shit as I am now.

You should all run out and get ACC CoverPlus Extra NOW.

Second, if you’ve got a company, you can get “Key Person Insurance” which pays the company a set amount each week if that person goes down. It’s to enable hiring a replacement, but I’m not sure if you’re required to actually do that (hire someone), so it will effectively replace earnings lost if you can’t work.

There’s also something like “earnings insurance,” I believe, which maybe does a similar thing.

Whatever, if you’ve this type of insurance I strongly urge you to dig out your Income Protection Policy and read it thoroughly to see if you’re in the same boat I find myself.

And look into ACC CoverPlus Extra.

Go on - DO IT NOW. You just don’t know when shit will happen!

Phil Burchell (DoP)