Beginners guide to income protection
Here's everything you need to know about income protection. Protect your family's financial future with the right cover
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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.
An typical policy:
- Pays an ongoing monthly benefit of up to 75% (in some cases 85%) of your pre-tax income until you return to work.
- Lets you cover your debts and expenses while you're out of work.
- Provides peace of mind and financial protection for you and your family.
How can this page help you?
Do you need income protection?
If you rely on your job to pay for your rent, mortgage or bills, then you need to think about getting income protection insurance. After all, how would you expect to pay for all these things if you were unable to work?
Income protection insurance then, helps replace the income you'd lose if you were unable to work due to sickness, injury or illness. It's really handy for parents with children or if you're self-employed, own your own business, or rely solely on your job to pay all the bills.
How does income protection insurance work?
Unlike other forms of life insurance, which offer a lump sum payment for successful claims, income protection cover provides an ongoing monthly benefit that is similar to a regular income. The monthly benefit is usually up to 75 or 80 percent of your income before you were injured or became ill, although you can choose a smaller benefit amount if you wish.
How can an income protection insurance policy help?
Income protection has plenty of benefits and can cover you financially in ways that many other types of insurance can't. Here's what an income protection policy can do for you.
Income protection: key benefits and features
- Peace of mind. You don't have to worry about your finances if an injury or sickness keeps you out of work.
- Financial security. Keep on top of mortgage repayments, rent and bills.
- Freedom. When you don't have to worry about money and making ends meet, you're free to focus on your recovery.
- Protection against the unexpected. Accidents and illness can strike at any time. Income protection insurance guarantees that you're prepared for the future no matter what it holds.
- Safety net. Income protection cover provides a crucial safety net, especially for self-employed people and small business owners.
Case study: Germaine returns to the work-force smoothly.
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 the cover, Germaine was able to take time off and recover.
Your claim can be considered full or partial. Some policies allow you to switch to another based on your ability to claim
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 where she is no longer working
"Your claim can be considered full or partial. Some policies allow you to switch to another based on your ability to claim"
Tips from Germaine
Make sure your claim is backdated to the original date you are diagnosed.
- 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 lot's of questions about how your cover works to see how you can customise it.
Cancer suffers 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."
Terms to understand when picking a policy
Choosing a policy can sometimes be a little confusing, especially when it comes to some of the insurance jargon providers like to use. To make things simpler, we've picked out some of the terms it's worth knowing the meanings of; that way, you can make a more informed decision about the policy that's best for you.
| Policy feature | Details |
|---|---|
| Premiums |
|
| Waiting period |
|
| Benefit period |
|
| Stepped or Level premiums |
|
| Agreed value policy |
|
| Indemnity value policy |
|
Picking a benefit and waiting period
A shorter benefit period means higher premiums, while a shorter benefit period leads to lower premiums.
If you're involved in an accident, the waiting period usually begins on the day your injury occurs, while policyholders who fall ill will begin their waiting period on the day their sickness is diagnosed.
Exactly which waiting period is right for you will be determined by how long you think you could manage financially without your regular stream of income.
Redundancy cover
If you are made redundant, there are a range of insurance providers that offer redundancy cover as an optional extra when you purchase an income protection policy. Redundancy insurance can come in handy if you do find yourself out of a job, giving you some short-term financial assistance to get by.
However, redundancy cover won't cover you if you resign. Usually you need to meet your insurer's definition of involuntary redundancy, e.g. if you've been 'let go', which can include:
- If you've been let go from a job that has been paying you a salary of some kind.
- If you are self-employed and your business has ceased trading because you're no longer able to meet financial obligations.
- If a contract has been prematurely terminated and not by you, e.g. it was 12 months but was ended by the employer earlier.
Redundancy insurance can be helpful if you think there's a chance you'll be made redundant. Consider the work environment you are in and whether redundancies are common. You should also think about how easy it would be for you to find another job quickly. Check the waiting periods and no claim period on redundancy policies as well. If you do add it your income protection cover, you don't want to be waiting a long time for a payment to be made.
What you need to tell your insurer when you apply
You should tell your insurer about anything that might impact their decision to insure you, whether you are applying for a new policy, renewing or switching products. This includes things like pre-existing medical conditions such as diabetes or kidney problems to what kind of job you do and whether or not you're a smoker. A good rule of thumb - if you think it's going to affect your cover in some way, you should let the insurer know. You also need to tell them about anything important that might have happened between the time in which you applied and when the cover starts.
Sometimes you'll need to provide medical history. If this is the case, you can get all the information from your doctor.
How much do income protection premiums typically cost?
Insurers use many factors to calculate your premium costs. These factors include:
- Age
- Gender
- Income
- Occupation
- Lifestyle
- Level of cover
- Type of premium
- The benefit and waiting periods
To give you a rough idea of insurance premium costs here are some examples of policy quotes taken from finder's comparison engine. Note that these samples are taken from the cheaper policies available and are not a comprehensive estimate:
*These are example quotes only for a range of ages and occupations. All quotes are based on a non-smoking NSW resident and are accurate for June 2017. Your actual quotes will vary.
Requirements from the insurer to get a payout
In order to qualify for an income protection benefit, your insurer needs to be satisfied that you are disabled and unable to work.
But there is no one uniform definition of disability across all Australian income protection policies. Instead, there are three different definitions that insurers use to assess degrees of disability:
- Duties-based disability. This is the most commonly used definition of disability. If it applies to your income protection policy, you will 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 able to perform some but not all of the income-producing duties associated with your occupation, you may be eligible for a partial benefit.
- Hours-based disability. Under an hours-based definition, you will qualify for a full income protection benefit 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 are still able to perform more than 10 hours a week in your usual occupation, your policy may pay out a reduced benefit.
- Income-based disability. If an income-based disability definition applies to your policy, your insurer will classify you as disabled if illness or injury has led to a reduction in your income by 20% or more. However, if you are still able to work and earn some income, you will receive a reduced benefit amount.
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 qualify for monthly income protection benefits.
James is a self-employed plumber who dislocated his knee during a rough game of OzTag. After going to hospital, James was devastated to learn the surgery and recovery time required six weeks off work. Even after that he would need several more weeks confined to crutches.
As a self-employed plumber with a mortgage, three kids to feed and no compensation or sick leave to fall back on, James was facing dire financial stress. Luckily, James's wife Tulia had persuaded him to take out income protection insurance two years earlier.
The policy - agreed value cover with a duties-based disability definition
James took out an income protection policy with a duties-based disability definition and agreed value cover. He was able to receive his full income while out of work. As he recovered and began taking on some light work James was able to continue receiving a partial benefit payment.
Because the policy had agreed value cover James's benefit payment was a set monthly amount comparable to an average month's income for James. This was fortunate because at the time of the injury James was going through a quiet patch and not making as much money. If he had taken out a cheaper indemnity value cover policy he would have received a much smaller benefit.
Making 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. It's always a good idea to call them directly to find out exactly what evidence they require. This usually makes the whole process much faster as it prevents delays. Some of the information you need generally includes:
- Your policy number
- The date your symptoms or health problem started
- When you stopped working
- Any medical forms from your doctor
- If relevant, copies of medical tests
- A Medicare authority form so that your insurer can gain access to medical forms and information
What else should I know about income protection?
- 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 – no need to serve a waiting period.
- You are covered 24/7. Income protection insurance covers you 24 hours a day, seven days a week no matter where you are in the world.
- 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.
Extra benefits to boost your cover
Income protection policies offer both built-in and additional benefits to give you optimal protection in the event of serious illness or injury. Some of these benefits include:
| Benefit | How it works |
|---|---|
| Trauma event benefit | A lump-sum benefit for trauma conditions that are specified in your policy |
| Death benefit | A lump-sum benefit in the event you pass away |
| Needle-stick injury benefit | This will pay a benefit if through the course of your occupation you become infected with HIV, AIDS, Hepatitis B or Hepatitis C as a result of a needlestick injury or splash injury |
| Bed confinement benefit | A portion of your monthly benefit is paid for each day that you are confined to bed and require the full-time care of a registered nurse |
| Accommodation benefit | Will reimburse the costs of an immediate family member's accommodation costs that travels over a specified distance to stay with you |
| Family care benefit | Will pay a benefit if a member of your family is forced to take time off of work to care for you and suffers a reduction in their income as a result |
| Business expenses benefit | This provides cover for fixed business expenses while you are disabled, enabling your business to keep afloat |
These are just some of the benefits you may be able to receive under different policies. Each policy will have details of exactly what's covered in the PDS.
Some other questions you might have
Interested in applying for income protection?
If you are looking for a new income protection policy or want to review your current policy to see if there's a more suitable option out there, you can make a no-obligation enquiry with a certified insurance consultant. A consultant can help you compare the different options available and provide you with a quote.
Quotes are provided free of charge and there is absolutely no obligation to sign up for a policy.
Compare income protection insurance from these Australian brands
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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