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What is income protection insurance?
Wondering how income protection insurance works? Your questions answered.
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Income protection is as simple as it sounds – it's insurance for your income. If you can't go to work because of sickness or injury, income protection will pay you a monthly benefit to replace your salary while you're out of action.
What is income protection insurance?
Income protection insurance is a monthly benefit that is paid to replace your income if you are unable to work due to illness or injury. Typically, payments are between 75-85% of your normal income. It is a really handy insurance to have if you rely solely on your income to live or have large financial commitments that would suffer if you were unable to earn an income.
Handily, income protection is often offered as part of superannuation policies. If you do not have income protection as part of your super you can also look at taking out a standalone policy.
How does income protection work?
Income protection insurance pays a monthly benefit if you're unable to work due to illness or injury. Basically, it's a stand-in for your regular earnings, so you don't fall behind on the bills.
Usually, income protection insurance will cover between 75-85% of your pay, but you can choose to protect a smaller portion of your income if you want to keep your premiums lower.
For example, you may have some savings which would tide you over, so only need to cover a smaller amount of your income.
If you want to claim on an income protection policy, you'll have to serve a waiting period first. This is the length of time between your first day off work and when you're eligible to claim. You set the waiting period when you first take out your income protection policy, and it's usually somewhere between 2 weeks and 3 months.
If you pass the waiting period and you're still unable to work, you'll then have to prove that your inability to work is due to illness or injury. This will typically be in the form of doctors notes and may include communication with your employer.
If you meet the waiting period and have proof or your inability to work, you will then receive monthly payments from your insurer. You can use the payments for whatever you like, including:
- Maintain your standard of living
- Pay off your mortgage
- Pay off your credit card and other debts
- Buy groceries and other everyday items
- Pay your kids' school fees
- Help cover the cost of your recovery
What does income protection cover?
Income protection can cover you for up to 85% of your normal income if you become too sick or injured to work for a period of time. Some insurers also offer an optional involuntary unemployment benefit (also called redundancy cover), meaning you can make a claim if you are let go unexpectedly. These are some of the common things you'll be covered for and also what is generally excluded under income protection insurance:
- Prolonged illness
- Total disablement
- Severe partial disablement
- Redundancy (optional extra on some policies)
- Illness or injury lasting less than the policy's waiting period
- Voluntary resignation from work
- Pre-existing conditions
- Regular pregnancy
What are the types of income protection?
When it comes time to take out your income protection policy, you'll be offered a choice between two kinds:
- Agreed value insurance. Under this, you'll be able to nominate a fixed claim benefit value up to 75% of your income at the time of taking out the policy. While this is the more expensive option, it can help preserve your benefit if you're unsure about your future income or know exactly how much you'll need to survive on in the event of not being able to work.
- Indemnity policies. These are more common and adjust your benefit value to reflect your income at the time of a claim instead of when you purchase the policy. They are cheaper, but your benefit can be affected by dropping to part-time work, taking extended leave or becoming unemployed.
When can you claim income protection?
To make a claim on your income protection insurance, your insurer must be satisfied that you are disabled and cannot work.
Unfortunately, disability doesn't have a common definition across income protection policies. Instead, there are three ways that insurers assess degrees of disability:
- Duties-based disability. This is the most common definition of disability. Under this, you qualify for the full benefit amount if your injury or illness prevents you from performing the income-producing duties of your occupation. If you are still able to perform some of your duties, you may be eligible for a partial benefit.
- Hours-based disability. Under an hours-based definition, you qualify for full income protection if you are unable to work in your own occupation for at least 10 hours per week. If your working hours are reduced by illness or injury but you can still put 10 hours a week or more into your usual occupation, your policy may pay out a reduced benefit.
- Income-based disability. With an income-based definition of disability, your insurer will classify you as disabled if illness or injury has led to a reduction of your income by 20% or more. However, if you are still able to work and earn some income, you can receive a partial benefit.
Before you apply for a policy, make sure you're aware of how the insurer defines disability and what conditions you will need to meet to make a claim.
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Case study
Germaine returns to the work-force smoothly.
Finder spoke to a 56-year-old legal professional who was able to access income protection.
Germaine was diagnosed with breast cancer in 2006, forcing her out of the workplace. Being unable to earn any income along with treating her cancer, Germaine was facing an uphill battle. Luckily for Germaine, she had an income protection policy that would cover up to 75% of her income. With this cover, Germaine was able to take time off and recover.
"Your claim can be considered full or partial. Some policies allow you to switch between them depending on your current situation."
Eventually, Germaine was able to return to the workforce part time. Her insurance policy allowed her to switch to a "partial benefit" to cover the days when she is not working.
Tips from Germaine about income protection
- Maintain your relationship with your insurer by doing all they require. "My insurer requires me to see a medical practitioner to maintain my status."
- Be super accurate with updates to avoid putting yourself in "pre-disability" status. "If you don't provide an insurer with the right information, you could find yourself in a situation where you're not covered."
- Questions are key. "Ask lots of questions about how your cover works to see how you can customise it."
- Cancer sufferers can access their super early. "It's known as early access. Some funds have different rules for granting this, so make sure you contact your fund."
How do you make a claim?
If you have to make a claim to your income protection policy provider, you'll need to provide them with evidence of your illness or injury. Calling your provider to see what evidence they need can speed up the process and prevent delays.
Some of the information you usually require includes the following:
- Your policy number
- The date your symptoms or health problem started
- When you stopped working
- Any medical forms from your doctor
- Copies of medical tests if relevant
- A Medicare authority form so that your insurer can gain access to medical forms and information
What are some typical income protection questions?
When applying for your income protection policy, your insurer will ask you the following questions:
- Basic information. Things like age, gender, income and occupation will factor into your premium costs.
- Medical conditions. If you have pre-existing medical conditions, such as diabetes or kidney problems, or if you're a smoker, your insurer will need to know. Sometimes they will require a copy of your medical history.
- Other relevant information. If there's anything that you think might affect your cover, such as if you're planning to switch to part-time work in the near future, you should let your insurer know.
Since you're the one purchasing the policy, you're entitled to ask questions too. You should consider checking the following:
- Disability definitions. As mentioned earlier, insurers define disability in several ways. Ensure you know what your insurer uses.
- How the cover changes over time. Some income protection policies can change as you age or switch occupations.
- Accident waiting periods. Certain policies will skip the normal waiting period if you suffer an accident and start paying your benefit right away.
- Exclusions. Make sure you know what won't be covered by your policy.
Other things to know about income protection
If you have any income protection questions left, here are some final things to consider:
- Workers compensation does not replace income protection. Just because you are covered by workers compensation does not mean income protection isn't useful. Workers compensation will only help you if you are injured in a work-related incident, while income protection can apply all the time, anywhere, and usually has fewer requirements to claim.
- You can take out cover through your superannuation. Income protection cover through your superannuation fund is generally cheaper than a standalone policy but will not offer the same level of cover.
- Your premiums are tax deductible. Income protection insurance premiums are generally 100% tax deductible. This may change if your cover is funded through your superannuation, so it could be worth getting in touch with a certified tax specialist to help you with any tax-related questions you may have.
- Some insurers offer day-one accident cover. There are some policies that provide cover straight away if you are injured in an accident and unable to work. This means there is no need to serve a waiting period.
- You are covered 24/7. Income protection insurance covers you 24 hours a day, 7 days a week no matter where you are in the world.
Some other questions you might have
Picture: GettyImages
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Ask an Expert
I will need to get both my hips replaced at different times. The dr said ill need 6 wks off and my income protection comes in after 30 days. My question is once it comes into affect do I start getting money from day 31 onward or do start getting it from day 31 bur also backdated to day 1? Does that make sense ? I don’t know how as the bread winner of the family how ill pay for mortgage on house and shop rent and expenses for a month without borrowing money off parents and would need to pay it back
Hi Steve,
Thanks for your question.
I understand your current situation especially since you are the breadwinner of the family.
Make sure your claim is backdated to the original date you are diagnosed. To accurately know the effective date of your income protection, the best way to do it is to reach out to your provider.
Hope this helps! For any further questions, feel free to reach out to us again, we’re here to help.
Best,
Nikki
WILL I GET ANY INCOME PROTECTION ASSISTANCE WHILE I AM ON SICK LEAVE
Hi Jeff,
Thanks for your inquiry.
Sick leave is designed to provide for situations which are short in duration. If you have income protection, income protection provides cover in case you cannot perform your usual occupation as a result of sickness or injury. Note that the duration of cover depends on your income protection policy but typically sick leave provides only limited coverage for time off work due to sickness. Generally, you only have around 10 days of paid leave per year linked to the government scheme – that’s for full-time employees.
Hope this helps! For any clarifications, feel free to message us again.
Best,
Nikki