Tax Deductible Income Protection for the Self-Employed.

Indemnity Income Protection for the Self-Employed: What You Need to Know

If you’re self-employed in New Zealand, you know the grind: chasing invoices, juggling GST, paying ACC levies, and trying to build a business while still paying the mortgage. One of the biggest worries? What happens if you get sick or injured and can’t work. That’s where Indemnity Income Protection comes in — and the good news is, in many cases, the premiums can be tax deductible.

Remember this is not tax adviceso check your individual tax situation with your accountant.

What is Indemnity Income Protection?

Indemnity income protection replaces up to 75% of your income if you can’t work due to illness or injury. Unlike “agreed value” policies, indemnity cover looks at your income at claim time. That means the benefit you receive is linked directly to your earnings before you got sick or injured.

For the self-employed, whose income often jumps around, this may be the only option available to you. It's fair to have concerns about a claim in a bad year but there is some protection for you in some policy wordings. It is also the reason to have a regular review of your cover so your earning growth doesn't outstrip your income protection.

The Tax Angle: Deductible Premiums, Taxable Benefits

Here’s the hook for many sole traders and contractors: in most cases, the premiums you pay for indemnity income protection can be claimed against your personal tax allowance. That means you may be able to offset them against your income when filing taxes.

Of course what the IRD gives with the right it takes with the left. If you make a claim, the payouts are treated as taxable income. They’ll be added to your other income for the year, and you’ll be taxed accordingly.

That doesn’t make the cover any less valuable; in any given year you are more likely to pay tax than to make an income protection claim. So you're gettin gmoney back either way.

Why This Matters More for the Self-Employed

Employees often have sick leave, annual leave, and sometimes even employer-sponsored insurance. Self-employed Kiwis? You’ve got none of that. If you don’t work, you don’t get paid. ACC might help for accidents, but it doesn’t cover the more likely illness — and that’s where income protection is a lifesaver.

The tax deductibility aspect makes indemnity cover especially attractive for business owners. You’re already used to claiming tools, laptops, fuel, or office space. Adding your insurance premiums to that list helps soften the cost.

Loss of Earnings vs Standard Indemnity

For the self-employed, understanding this difference is huge.

• Standard Indemnity: At claim time, the insurer looks at your income (usually based on financial statements or tax returns). They then pay up to the insured percentage, often 75% minus any other 'offset' income such as ACC.
• Loss of Earnings: This version looks at the difference between your pre-disability income and what you’re still earning and pays 75% of the difference. For example, if you’re on ACC, loss of earnings cover can “top you up” closer to your pre-disability earnings. It will almost always work out better.

For contractors, tradies, or anyone whose income fluctuates, loss of earnings can generally be a better fit, even if it costs a little more.

Why Get Covered at All?

At the end of the day, indemnity income protection isn’t just about tax deductibility or policy definitions - it’s about survival. Your income is your biggest asset. Without it, the bills don’t stop: mortgage, rent, suppliers, and day-to-day living still need to be paid.

For self-employed New Zealanders, there’s no employer safety net. You are the safety net. Indemnity income protection, with the potential tax deductibility of premiums, gives you a way to keep money flowing when you can’t work. Yes, the claims are taxable — but that just means they’re treated like the income they’re replacing.

Final Word

Indemnity income protection can be a smart move for self-employed Kiwis, especially when you consider the potential tax benefits. But the devil is in the detail: claims are taxable, benefits depend on your income at claim time, and every business is different.

Talk to us about the right policy structure, and talk to your accountant about the tax treatment. Getting both perspectives is the best way to protect your livelihood without any nasty surprises.

Cover Yours Ltd (FSP769531) and Marc Hamilton (FSP306046) are registered Financial Service Providers and you can search the register here. Marc Hamilton is a member of the FSCL Disputes Resolution Service. Cover Yours Ltd and Marc Hamilton’s disclosures can be found here or by emailing marc@coveryours.co.nz