Income protection for self-employed New Zealanders: what to check before you claim

If you work for yourself, your ability to earn is the engine of everything else — the mortgage, the family budget, the business itself. Income protection insurance is designed to keep that engine funded when illness or injury takes you off the tools or away from your desk. But a policy only earns its keep at claim time, and the details that decide a claim are set long before you ever need it. Here is what to check, ideally well before you have to.

Agreed value vs indemnity: the difference that matters most

There are two ways insurers can calculate your monthly benefit, and for self-employed people the difference is critical. With agreed value cover, your benefit is fixed when you take out the policy, based on the income you declare at that time. If your income dips later, your benefit stays the same.

With indemnity cover, the insurer checks your income again at claim time and pays a percentage of whatever you are earning then. The premium is usually cheaper, which is why it is often the default. But if your income has fallen, is seasonal, or is hard to prove through formal financials, an indemnity policy can pay far less than you expected — precisely in the year you can least afford it.

For most self-employed New Zealanders, agreed value is worth the higher premium. You are paying to remove uncertainty, and agreed value does exactly that.

How insurers assess self-employed income

Salaried employees prove income with a payslip. You prove it with financial statements, tax returns and, for company or trust structures, the salary and distributions you actually take. Insurers look at the most recent complete financial year, and they will average out good and bad years for some occupations.

A few habits make any future claim dramatically easier:

• Keep business and personal finances in separate accounts, with clean records of what you pay yourself.
• File your tax returns on time — an insurer cannot assess income it cannot see.
• Keep copies of contracts or engagement letters that show your ongoing work commitments.
• Tell your adviser when your income changes materially, so the cover can be adjusted rather than disputed later.

Waiting periods: how long can you float?

Income protection policies start paying after a waiting period — commonly four, eight, thirteen, twenty-six or fifty-two weeks. The longer the wait, the lower the premium. The right waiting period is the longest gap your own resources can comfortably bridge: your savings, your partner's income, any sick leave entitlements, and how quickly your business could keep paying you.

Two things catch self-employed people out. First, ACC covers accident injuries only — not illness, back problems, or burnout, which are among the most common reasons people stop working. Second, some policies offer an ACC offset option: the premium is lower because any ACC weekly compensation reduces your benefit. That trade-off can be sensible, but you should choose it knowingly rather than discovering it on a claim form.

Keep your records claim-ready

A claim is a paperwork exercise conducted at the worst possible moment. Everything the insurer will ask for already exists in your business if your records are in order:

• Your latest financial statements and IRD returns.
• Records of the income you declared when the policy was set up.
• A simple diary of appointments or jobs missed because of your condition.
• Your medical records — ask your GP early, as specialist reports take time.

Why having an adviser matters at claim time

Anyone can buy income protection online. What you cannot buy online is someone who knows your policy's definitions, lodges the claim on your behalf, chases the insurer for updates, and pushes back when a definition is applied too narrowly. At claim time an adviser works for you, not the insurer — and after two decades of supporting clients through claims, we know where these processes stall and how to keep them moving.

If you are self-employed and have never reviewed your income protection — or you are not sure whether you hold agreed value or indemnity cover — a short conversation now is far cheaper than a declined claim later. Book a free consultation with MFSS and we will walk through your policy with you in plain English.