Offsets
An offset is an amount that may be deducted from an Income Protection benefit because you are receiving, or are entitled to receive, another income or compensation payment for the same or a related disability.
The most common example in New Zealand is ACC.
An offset does not necessarily mean you have no Income Protection benefit. Instead, your policy may be designed to take other payments into account when calculating how much it will pay.
The exact offsets that apply depend on your insurer and policy wording.
Income Protection is designed to replace part of your income when you are unable to work because of an eligible illness or injury. However, you may also be entitled to receive money from another source while you are unable to work.
For example, if you are injured and receive ACC weekly compensation, your Income Protection policy may take that ACC payment into account. The ACC payment could then be deducted from the amount your Income Protection policy would otherwise pay.
This is known as an ACC offset.
Other payments can potentially be treated as offsets too. Depending on the policy, these can include other income replacement or disability benefits, payments from another insurer, employer remuneration or sick leave. Some policies can also take income earned while disabled into account.
Importantly, offsets are policy-specific. One insurer's definition of an offset may not be identical to another insurer's.
Some policies may also distinguish between money you are actually receiving and money you are entitled to receive. For example, a policy may allow an insurer to take an ACC entitlement into account even if you have not yet received the ACC payment.
This is why understanding the wording of your Income Protection policy is important - particularly if you have multiple income protection policies or other forms of income protection.
An example
Let's say James has an Income Protection benefit of $4,000 per month.
He suffers an injury and is eligible for $2,500 per month from ACC.
If his Income Protection policy applies a dollar-for-dollar ACC offset, the calculation could look like this:
Income Protection benefit: $4,000
Less ACC offset: $2,500
Income Protection payment: $1,500
James could therefore receive $2,500 from ACC + $1,500 from Income Protection = $4,000 in total income replacement, before tax and subject to the individual policy terms.
The important point is that the $2,500 ACC payment doesn't necessarily sit on top of the full $4,000 Income Protection benefit.
The Income Protection policy may be designed to take the ACC payment into account.
Why It Matters
Offsets are important because they affect what you could actually receive at claim time.
It is easy to look at an Income Protection policy and think:
“I have $4,000 a month of cover, so I'll receive $4,000 a month if I can't work.”
That isn't necessarily the case.
If your policy has an offset provision, the amount you receive may be reduced by other payments you are receiving or entitled to receive.
This is particularly relevant when considering ACC alongside Income Protection.
It can also matter if you have more than one Income Protection policy. Some policies contain provisions dealing with benefits held with other insurers, and the insurers may coordinate how the offset is applied.
Common Misunderstandings
“An offset means my Income Protection isn't paying.”
Not necessarily. An offset generally means another payment is being taken into account when calculating your Income Protection benefit.
“ACC is always paid on top of my Income Protection.”
Not necessarily. Many Income Protection policies take ACC payments into account first.
“If I don't claim ACC, my Income Protection will pay the full amount.”
Not necessarily. Some policies can take an ACC entitlement into account even if you are not receiving the payment.
“All Income Protection policies have exactly the same offsets.”
No. Offset provisions vary between insurers and policy wordings.
“If I have two Income Protection policies, I'll automatically receive both full benefits.”
Not necessarily. Policies can contain provisions dealing with other income replacement benefits, and insurers may coordinate the benefits.
FAQs about Offsets
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An ACC offset is where an Income Protection insurer takes an ACC payment or entitlement into account when calculating the Income Protection benefit payable for the same or related disability.
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It can. Many Income Protection policies include provisions that reduce the benefit by certain ACC payments or entitlements. The exact calculation depends on the policy wording.
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This varies between policies. Potential examples include ACC, other income replacement or disability benefits, benefits from another insurer, employer remuneration and sick leave.
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No. Offsets are particularly relevant to income replacement benefits, such as Income Protection. They should not be assumed to apply to other types of insurance such as Life or Trauma Cover.
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The policies may contain provisions dealing with other income replacement benefits. The insurers may need to determine how the benefits interact, so having multiple policies does not necessarily mean you will receive the full scheduled benefit from each policy.
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Because the amount shown on your policy schedule is not always the same as the amount ultimately paid at claim time. Other payments and the policy's offset provisions can affect the final benefit.
Income Protection can be an important part of protecting your income, but understanding how the benefit is calculated at claim time is just as important as knowing the amount of cover you have.
At New Vision Financial Services, we can help you understand how your Income Protection works alongside ACC and other sources of income, including any potential offsets.
Knowing what your policy will actually pay when you need it can give you much greater confidence in your financial protection.