Diana Clement: More to income protection than just ACC

Without income protection insurance you're likely to be condemned to a diet of baked beans with just a benefit to survive on. Photo / Bradley Ambrose

Worth seeking advice from financial adviser who specialises in insurance.

C-r-u-n-c-h. That's the sound of your back going as you stand up from reading the newspaper. No worries. ACC will cover your lost earnings from this accident. Or will it?

"Yes" is usually the answer. But there is much more to know about ACC if you want to ensure long-term financial security.

ACC cover is very much like an insurance policy. You pay premiums (ACC levies) and if you meet the terms and conditions of the policy (ACC legislation) you are paid certain benefits, including weekly compensation of lost earnings.

ACC doesn't just provide one type of insurance. The standard cover that most people know about is called ACC CoverPlus. It can pay for the cost of treatment and rehabilitation and, if relevant, weekly compensation of 80 per cent of lost earnings.

There is another cover called ACC CoverPlus Extra (CPX). This cover, which is held by 40,000 Kiwis, can be taken out instead of CoverPlus and lets self-employed people and non-PAYE shareholder employees negotiate a pre-agreed level of lost earnings compensation. CPX customers are still entitled to treatment and rehabilitation costs covered by the ACC Act.

The salary self-employed people pay themselves doesn't always reflect their true earnings. If, for example, that person's true earnings are $130,000, but were split equally between two spouses, the main earner would be entitled only to $52,000 from ACC CoverPlus if the other spouse can't continue operating the business.

"Self-employed people should be taking CoverPlus Extra out to create certainty," says financial adviser Steve Morris of SW Morris Associates.

CPX pays 100 per cent of the agreed level of compensation, even if the business continues to run and pay dividends to the injured person.

The levies for CPX are calculated using the previous year's earnings and the levy rates specific to the business. ACC has a premium calculator on its website that can be found at: http://tinyurl.com/CoverPlusExtraCalculator.

Examples of what CPX costs are:

Mr B is a roofer and had liable earnings for the 2011-12 year of $60,000 and has agreed a level of cover of $50,000 a year. His 2012-13 levy would be about $4000.

Mr D is a pig farmer and had liable earnings for the 2011-12 year of $60,000 and has agreed a level of cover of $50,000 a year. His 2012-13 levy would be about $3300.

CPX has another option called Lower Levels of Weekly Compensation, which has lower premiums in return for a level of compensation that reduces the more hours you are able to work.

More details such as cover for people in business partnerships, those who have withholding tax deducted from their earnings, and for part-time self-employed people can be found here: http://tinyurl.com/CoverPlusExtra.

It would be easy to think that the only reason to go onto CPX would be to increase the amount of cover.

CPX can also be used to reduce the amount a self-employed person pays to ACC. The minimum for the 2012-13 year is $21,614.84 this year, and the maximum is $91,014.56. This is the agreed value that would be paid out.

Someone who chooses to take a lower amount of cover can then put those savings towards private income protection or total permanent disablement (TPD) insurances.

Those who choose to reduce their CPX cover need to factor in the smaller pay-out and consider how they will live before their income protection insurance pays out, says Morris. If they don't have an emergency fund, they may not be able to survive on the reduced CPX monies until their income protection insurance payments come in. Such policies typically have a 13-week stand down period compared with ACC's seven days.

There are a number of reasons to reduce cover, says Morris. The first is that 80 per cent of disability claims to insurers are as a result of illness, not accident. So accident cover alone through ACC isn't enough to protect people's incomes.

The idea of pruning the CPX cover makes sense for people who would have private insurance anyway.

But there is a trick to be wary of. Not all private insurance policies recognise CPX, says Morris. Some assume all policy holders are covered by CoverPlus. If the person has CPX for a lesser amount the policy may still assume that CoverPlus was paying out the standard 80 per cent of income, even though it wasn't. That assumed payment would be deducted from the private insurance policy's weekly or monthly payment.

This is what insurance companies call "offsetting". Insurance isn't designed to put you in a better position financially than you would have been otherwise. So insurance companies offset any payout from ACC against what they would have paid. This can often be found in the fine print of the policy wording referring to "Other Benefit Payments" or similar.

It is one of the many reasons why it's worth seeking advice from a financial adviser who specialises in insurance. An adviser can also help get a claim paid - especially when it is borderline.

Although regular employees can't cut down the amount they pay to ACC, it's a good idea for them to consider taking private insurance as well to get cover for risks outside the ACC legislation.

Morris cites the example of a construction worker who suffered a work-related brain injury on-site in Sydney. The man can never work again and has returned to New Zealand. ACC doesn't cover him because the injury occurred overseas. He will be entitled only to a Work and Income benefit in New Zealand, which pays a minimal amount compared with what he might have received from an income protection policy.

A spokesman for ACC says it can consider claims for help for injuries received overseas. The cases are assessed on a case-by-case basis. "It's important to note that ACC can only cover injury-related costs incurred once the person returns to New Zealand - we can't cover costs incurred overseas," he says.

Another reason for wage and salary earners to have extra private income protection insurance is to cover those times when they're not working. If people go on maternity leave or sabbatical, for example, and are not earning a wage or salary in the weeks before an accident, they get no payout from CoverPlus.

Another issue to be aware of with both types of ACC cover is the spectre of "degenerative conditions", which are typically excluded by ACC, but would usually be covered by a more general income protection or TPD policy. ACC won't pay for injuries deemed to be the result of degenerative conditions. Private insurance, however, doesn't usually have those limitations.

Morris adds that we live in a "global village" with people moving overseas to work. They can't take ACC cover with them, but they can take their private income protection cover.

One trick here is that New Zealand income protection insurance cover tends to be cheaper, says Morris, than overseas cover. That's in part because the underwriters factor in ACC, which reduces the amount they need to pay out in the event of a claim.

Most private income protection and TPD policies are still valid if you move overseas - providing you keep paying the premiums, says Morris. Even while overseas the policy holder is still charged at a rate that takes ACC into account.

Neither ACC cover nor private insurance cover is straightforward. Each has its own exclusions and every year there are cases of people who have become, or believe they have become, disabled, who miss out on payments.

ACC cases are documented on the extremely busy forums at ACCforum.org and on the decision database for the Accident Compensation Appeals District Court Registry, which can be found at http://tinyurl.com/ACCappeals.

Results of cases taken to the Insurance and Savings Ombudsman about private insurance claims can be found at http://casestudies.co.nz/html/search/default.aspx.

•Last week I wrote about interest-free hire purchase deals and why they weren't such a great "deal". A reader posted on NZHerald.co.nz with a simple, but clever, point that I wanted to share with readers of the paper. Neil from Auckland Central pointed out: "It's also interesting to note that 'specials' at most retailers rotate through interest-free deals and 10-20 per cent off deals. So in effect, when going interest-free, you are already paying more."