Serious illness equals serious financial trouble

Key point summary:

• 972,700 households with annual incomes $20,000+ do not have income protection
• Each year the primary income earner in 14,980 of those households will fall seriously ill and be unable to earn for six months or more
• Those households plunge into The Great Financial Vulnerability Gap at the rate of 288 per week
• With sickness benefits means tested on total household income, thousands of families immediately face serious financial and emotion hardship

New research has revealed what is being called the Financial Vulnerability Gap into which thousands of New Zealand households are falling each year when the main income earner falls seriously ill for more than six months.

The research, part of a  major two-year project undertaken by the Financial Services Council, finds 85% of people aged 18+ do not have income protection insurance.

This equates to about 972,700 households nationwide.

The research also finds that within those households the incidence of the main income earner falling seriously ill and being unable to earn for six months or more is 2.6 times greater than the main income earner having an accident and receiving ACC payments for six months or more (where the Accident Compensation scheme covers 80% of earnings).

Those who fall seriously ill and do not have income protection insurance must rely on the state’s sickness benefit, which is based on total household not personal income. It pays a couple with or without children about $341.60 a week (at the M tax rate).

According to FSC Chief Executive Peter Neilson, this opens up a huge gap between what is provided by the sickness benefit – and what households need to pay their bills, after using up their savings, and sick and annual leave entitlements.

In cases of long term sickness or unemployment many households find they are too rich to get an income-related benefit but too poor to pay the rent or mortgage.

The FSC research finds most households have little or no reserves and would very quickly find it very difficult to cope with loss of the primary income. The research reveals:

• households are falling into the Financial Vulnerability Gap at the rate of 288 a week, or 14,980 a year.

Serious financial difficulty then strikes quickly after sick and annual leave and savings run out:

• 20% of households would only be able to continue to meet their expenses for 1 week
• Another 14% would be able to continue for only 2 weeks.
• By 4 weeks 55% of households overall would be unable to pay all their expenses and maintain their lifestyle.

Only 20% of households would be able to cope for more than 12 months.

If the primary income earner is not able to work, households plunged into the gap would need an average of $652 after tax per week to meet their expenses and maintain their lifestyle.  The amount required rises with average annual household income:

Households with a mortgage need more than the average to meet their commitments, as do households with children. There is a significant gap between what is needed and what is available through the state as a sickness benefit.

The incidence of income protection insurance among mortgage holders is greater than the overall 15%, but at least 70% of households with a mortgage do not have income protection. 

Based on the data from a national survey in September and October 2012 and using Statistics NZ estimates of the number of households at 30 September 2012:

• 972,700 households with an annual household income greater than $20,000 do not have income protection insurance
• 13,030 of those households will experience an illness event each year where the main earner is unable to work for 3 months to 6 months.  As a comparison, 10,300 of those households will have the main earner experience an accident resulting in them being unable to work for 3 months to 6 months.
• 14,980 of those households will experience an illness event each year where the main earner is unable to work for 6 months or more.  As a comparison, 5,800 of those households will have the main earner experience an accident resulting in them being unable to work for more than 6 months.

Insurance industry experience indicates that payments are made to replace income for seriously ill people for an average of 492 days. This compares with payments for an average of 306 days to those who have a serious accident.

Mr Neilson says the research, covering 3,343 New Zealanders and undertaken by Horizon Research in September and October this year, finds that in the past five years a serious illness has stopped 14.4% of adults from working for between three and six months, and 14.3% from working for more than six months.

This compares with accidents stopping 8.9% from earning for three to six months and 6.2% for six months or more. The difference is that everyone is covered for accidents with ACC but fewer than one in five are covered for long term sickness.

Mr Neilson says the chances of a main earner being off work because of serious illness for six months or more are 2.6 times greater than having an accident with the same impact on the ability to work.

“But hundreds of thousands of households are vulnerable to suffering a financial crisis caused by serious illness.”  For dual income families income protection insurance is now a “must have not a nice to have”.

The FSC, whose 22 member and 17 associate-member companies manage more than $80 billion in savings and provide financial services to more than 2 million New Zealanders, has undertaken the under-insurance project to produce the first overall understanding of the extent of under and over insurance for life, illness, trauma and disability.

Over the past two years it has commissioned Nielsen to conduct a quantitative online survey of 2000 18-69 year-olds on the extent of their insurances overall. Infometrics undertook an econometric analysis which helped inform focus group research and the development of an analysis model by Massey University. This model was used to inform a Massey report (available at www.fsc.org.nz) on the extent of under and over insurance. Horizon Research then undertook an online quantitative and qualitative study of 3,343 adults to determine the extent of income protection and financial vulnerability of those suffering primary income earner loss from serious illness for six months or more.

Mr Neilson says: “The Massey report concluded New Zealanders were under-insured for income protection by $2.9 billion a month.”

“Clearly we need to heighten awareness of this vulnerability gap. The insurance industry could also do better in providing more easily understood insurance policies with easier ways for people to assess their insurance needs, understand policies and the cost and buy cover.”

The FSC was today also launching a unique new online calculator to help people instantly assess their vulnerability to under insuring for life, traumatic events, disability and serious illness.

The FSC had last year suggested Members of Parliament look at adding 1% to KiwiSaver contributions, if KiwiSaver were made compulsory. This would provide income protection insurance to all earners for up to two years after annual and sick leave were used.

“Our research shows we need education to make sure people know about and can try filling the vulnerability gap,” Mr Neilson says.

Download the full Horizon Research report revealing New Zealand households' vulnerability to income loss through serious illness here.