What exactly is income protection? Read through our guide to get a complete understanding of how it works, so you can find the right policy for your needs.
The ability to earn an income is your most valuable asset, so planning for the unexpected should be your number one concern. Nobody knows when tragedy could strike – an accident or illness could see you unable to work and your income cut off.
A quick summary of what income protection can do
Also known as salary continuance, income protection insurance provides peace-of-mind that you will continue to see money coming in while you’re off the job, and that you will be able to provide for your family and dependents despite being on the road to recovery.
What's in this guide?
- Chapter 1: What is income protection?
- Chapter 2: Why should I get income protection
- Chapter 3: How does income protection work?
- Chapter 4: Important definitions
Getting the right income protection policy
Income protection insurance provides peace-of-mind that you’ll be able to support yourself and your family when you’re unable to work because of an injury or illness. This can also include times when you become temporarily or permanently disabled, or have a limited work capacity.
The insurance benefit allows you to focus on your recovery and not the added headache of how you’re going to pay the bills. This is done by compensating you with 75% of your gross monthly earnings.
What does income protection insurance provide?
Salary continuance insurance provides a portion of your income when you’re off work because of injury or sickness. It gives you an assurance that you will be able to look after your loved ones when you are unable to work. Here’s how it can help.
- Income replacement. Income protection insurance provides up to 75% of your gross monthly earnings.
- Cover inside and outside of work. You are covered any time you’re injured or fall ill, wherever you are in the world.
- Additional benefits. Superannuation benefits continue under income protection policies.
The costs of an injury or illness
Below are some of the direct and indirect costs of an injury or illness that forces you out of work:
- Rehabilitation costs. The road to recovery could be an arduous journey when coupled with the financial burden of accommodating a potential turn in mobility or home access.
- Income issues. Your partner or spouse is likely to become your carer, and this could mean a loss of their own income and a downturn in your family’s overall financial security.
- Carer costs. If you require constant care and help, extra money will be required to seek this kind of help. It could amount to thousands of dollars a month.
- Travel aid. If you’re injured or become sick overseas, money could be needed to see you sent home for medical treatment and care.
- Business cover. If you’re self-employed or own your own business, you may require finances to keep your company afloat.
- Debt and credit. You could be forced to rack up unwanted financial debt through banks and creditors just to keep your family above the bread line.
- Groceries. Putting food on the table is one of life’s necessities, but without a protection plan in place, you could be forced to fork out for this through your savings.
- Utilities. The great Australian dream is at risk if you can’t afford to pay for water, gas or electricity. You may have to sell your home or move to somewhere more affordable.
- Education fees. You may be unable to send your kids to a private school or university, missing out on the education they deserve.
If you’d like to know more about how income protection works, continue reading through this guide. It will help you understand why it’s imperative to protect your earnings.
Points to remember
- Up to 75% of your gross monthly earnings are covered under the policy.
- Some insurers will allow up to 15% additional cover, but this will normally be linked to superannuation.
- You can choose the timeframe for your benefit to be paid. This is anywhere from two years, up until the age of 65.
- Premiums are tax-deductible, so you can save on your tax return.
Now that you know the basics of how income protection works, let’s take a closer look at what benefits you could receive.
Financial stress is something we all want to avoid, but unfortunately many people without an income protection policy will be forced to pay for medical expenses and daily necessities in the event of injury or illness, regardless of their lack of income. This includes paying for the ongoing costs of supporting their dependents. While the insurance does not fully compensate your lost income, it does secure up to 75% of your monthly earnings while you’re off work.
Why create an income safety net for future health and medical issues?
Suffering a sickness or injury could keep you in a hospital bed, or in home care until you’re fit to return to work. This will mean you’ll likely lose a large portion of your stash of cash to keep food on the table, and also fork out for daily necessities, utilities, and a roof over your head.
The most important point to think about is that an illness or injury can have severe financial repercussions if you’re unable to work, and it can happen to anyone, anywhere, and at anytime.
Being off work without an income could place your family in a difficult financial position. You can avoid entering the savings drain by speaking to an adviser about a policy that is right for you.
Will income protection cover me if I am made redundant?
Employees who’ve been made redundant aren’t covered under income protection. However, some policies offer an additional option that can help in such a situation. This is known as a Premium Waiver for Involuntary Unemployment feature, and can be purchased as an add-on to your policy when signing on.
Certain insurers will waive your premium if you find yourself out of work, but it’s up to your policy holder to agree to this. Other instances that will see your premium waived can include maternity leave, a sabbatical, paternity leave and working as a carer.
Income protection gives you assurance that you will continue to receive a portion of your wage or salary if you are sick or have an accident and you’re unable to work.
- Income protection insurance provides 75% of your monthly earnings any time you're off work because of injury or illness.
What factors influence the cost of income protection policies?
There is a range of factors insurers will evaluate when devising a policy for your needs. Here’s a list of what agencies will look at.
- Age. The older you are the more risk you carry of becoming ill or sustaining injury due to ageing. This will impact your premium.
- Gender. Insurers see woman as more likely to take time off work due to pregnancy. Females are also viewed as being more prone to health risks and complications during childbirth, so premiums are generally higher.
- Current health conditions. Any medical illness or injury already sustained or requiring treatment will be taken into account. Normally this will mean an added timeframe before benefits apply.
- Pre-existing medical conditions. Any previous condition you have suffered will see your premium rise due to the increased risk of falling ill again, or relapsing.
- Occupation. Your job description and duties will impact your premium and waiting period to receive benefits. The more dangerous the job, the higher the risk and therefore the more expensive your premium will be. Think of the differences between working in underground mining or as a skydiving instructor, as opposed to a banker.
- Lifestyle choices. If you live an outdoor lifestyle and participate in activities like base jumping or other extreme sports, your added risk of injury will see your premium skyrocket.
- Smoking. You’ll pay more because of the increased risk of having medical issues like lung cancer. Typically, if you haven’t been smoking for at least 12 months, you will be considered a non-smoker for insurance purposes.
What types of income protection policies can I choose from?
There are three types of policies you can choose from before signing. They are:
- Agreed value
- Guaranteed agreed value
- Indemnity value
It’s important to look at how each type of income protection policy could impact you when making a claim. Here’s a quick guide on how each policy structure differs from the others.
Agreed value policies
Here your benefit is fixed and remains constant at what you had been earning at the time you took out your policy. With this policy, you will avoid losses if you see a reduction in your income.
Guaranteed agreed value policies
This is the same as agreed value, but insurers use it to ensure they have your information related to earnings on file.
Indemnity value policies
Your benefit is relative to your income at the time you make a claim. This means that if it has reduced or increased, insurers will compensate you in line with your current wage or salary.
Now that you’re aware of how each policy type will impact your benefit upon making a claim, it’s imperative to understand what kind of injuries and illnesses are covered.
Given Australia’s apathetic approach to income protection, insurance agencies have taken a competitive approach by offering a variety of benefits. There are wide-ranging definitions for the illnesses and injuries covered by different protection schemes, so it’s vital you understand what is and isn’t covered under each policy.
The best way to understand when a benefit can be paid is to read through your product disclosure statement (PDS). This is a form that insurers provide clients to explain how the premium is devised, and what the included and optional benefits are.
Definitions of disabilities under income protection insurance
There are two ways insurers determine your disability. They are generally classified as either partial or total disability. They can also be called temporary and permanent disability. Let’s break it down even further.
A total or permanent disability is used to determine that an individual has suffered a critical accident or illness and is unable to return to work, or can’t continue their normal duties.
There are three types of characteristics used to determine whether you are totally disabled.
1. Duties-based total disability
Used to classify when you’re unable to perform one or more employee duties because of an injury or accident.
Each insurance agency differs on when you can be compensated for a duties based disability. Typically, you’ll need to meet the following guidelines:
- You’re unable to perform one or more of your roles outlined in your job description
- You can’t carry on with essential and important duties outlined in your employment contract
- You are not able to perform every duty expected by your employer
2. Income-based total disability
This is when you witness a reduction in your income due to an accident or injury. It’s important to note that insurers will differ on how much compensation you can receive.
3. Hours-based total disability
Refers to when an individual has an incapacity to perform the normal number of hours of their working week, due to injury or illness.
Individuals may suffer a disability or illness but are still able to work part-time in the workplace. This is where partial disability steps in. Under this definition, a person must have been totally disabled for the set minimum waiting period, and a medical professional must determine them as being partially or totally disabled. After this time a benefit is paid following their claim.
1. Duties based partial disability
This is determined by whether you can or can’t perform your normal or essential duties at work. It is calculated by using the following formula.
- Income prior to disability - current income x monthly benefit
2. Income based partial disability
If you experience a reduction in your income, insurers can compensate you for any losses after making a claim. In some cases, you can receive a benefit despite earning 20% of your wages or salary before you were injured or became sick.
3. Hours based partial disability
Insurance agencies assess an hours-based criteria as how much time you’re able to spend at work following an injury or illness. Some policies will weigh up a 10-hour clause, meaning you can work for that time each week and still meet the guidelines to receive compensation.
Workers compensation refers to the insurance that is offered by your workplace to cover your income if you fall ill or get injured whilst at work.
|Covered for injuries or illnesses in the workplace.||Must prove the employer is at fault through negligence before a payment is received.|
|You can receive lump sum payments or weekly instalments, but they can be withheld until medical backing is given.||You won’t receive a benefit for injuries outside the workplace.|
|Provides financial assistance for medical costs, including rehabilitation.||Compensation may not come soon enough to cover money forked out for short-term treatments.|
|Provides finances for legal aid when chasing compensation through a claim.||The claims process can be lengthy during a time that is often draining.|
WorkCover changes affecting employees in NSW
There have been major changes to WorkCover for both employees and employers since the New South Wales government revamped it. The insurance scheme aims to assist workers who are injured on the job, but the changes have seen widespread impacts for employees claiming compensation for certain illnesses and accidents.
If you become sick or injured on the job, you must notify the insurance fund within 48 hours to begin the process of financial compensation. Employers and the insurance fund will determine your level of compensation and whether there are any suitable roles you can continue to fill through a work capacity assessment. If you are deemed seriously injured, you are exempt from this assessment.
A worker with 30% permanent impairment is determined as being seriously injured.
It’s important to note that seriously injured workers are also exempt from time limits for weekly payments and any other medical-related expenses.
Key changes to cover in 2012
The 2012 overhaul of workers’ compensation shows that it’s becoming more difficult to rely on the insurance fund for financial aid in the event of an injury or sickness suffered on the job. Not all workplace accidents are covered following the 2012 revamp in New South Wales. The scheme no longer covers the following occupations and injuries:
- Dust-related claims
- Surf life savers
- Fire fighters, including Rural Fire Service volunteers
- Paramedics and other emergency service volunteers
- Police personnel
- Coal miners
The following points show exactly how payments are scheduled for employees who’ve made successful claims.
Changes to claims processes for WorkCover (NSW)
|Type of claims||Key changes|
|Weekly incapacity benefit (conditional)||
|Payments of medical benefits||
|Nervous shock claims.||
|Stroke and heart attack claims||
|Injured employees returning to work||
Pre-existing medical conditions under income protection
Am I covered for pre-existing conditions under income protection?
You can receive compensation for a claim related to an illness or injury that took place prior to taking out your income protection policy, but honesty is the key if your claim is to be given the green light. If you have suffered a pre-existing medical condition, you must inform your insurer when starting your policy and disclose all relevant medical information to avoid your fund knocking back your request for financial assistance.
Your insurer has the right to deny your claim if you have hidden a pre-existing medical condition.
Before signing on to an income protection policy, you should speak to a financial adviser or your chosen insurance fund about what kind of cover is applicable for any pre-existing and future medical situations.
Insurance companies vary between providing cover for certain injuries and illnesses. Here’s a list of medical conditions which may or may not be covered under income protection.
- Cardiovascular disease
- Muscle and joint disorders
- Sleep deprivation
- Skin diseases
- Visual impairment
- Mental illnesses
Your product disclosure statement (PDS) is the ultimate guide to determining what is and isn’t covered. It will underpin all exclusions within the parameters of your policy. Be sure to carefully read your PDS before signing on; this will ensure you have the right terms of cover for your current and future needs.
Getting the right income protection policy
- Chapter 5: How much income protection do I need?
- Chapter 6: Additional features
- Chapter 7: Cover through superannuation
- Chapter 8: So how much will it cost me?
- Chapter 9: Income protection for specific occupations
- Chapter 10: Purchasing an income protection policy
- Chapter 11: Tips for comparing cover
The future is unpredictable, so income protection policies are tailored to meet the potential future needs of yourself and your family. You must ask yourself how much protection you will need going forward. Another question is, what benefits do you believe you’ll need in order to be compensated in the event of an accident or injury?
Think about how being off work will impact your savings and your ability to provide for your loved ones.
Everyone must weigh up how much income protection they’ll need, because being off work without an income security strategy will impact your savings and your ability to look after family members. Ask yourself these questions to ensure you’re protected against life’s uncertainties.
Key questions to ask yourself
- Do you have any dependents that need financing for education? Think of university fees, and any future expenses like credit costs and potential loans.
- How much does your lifestyle cost, including that of your family? This could also change in the future.
- Do you have enough savings to fork out for your daily duties? This is including any unforeseen medical bills.
There’s no one-size-fits-all approach to income protection, so be sure to find the policy that best suits your needs.
How do I calculate a suitable level of income protection?
You can assess how much cover is within your budget by using an income protection calculator. This will allow you to determine the right premium to suit your current pay-packet and circumstances. You can use the following method to calculate the right cover for your needs.
General calculation method: Income per annum (12 months) x 75% = suggested income protection cover.
Consider your monthly expenses too
It’s imperative to weigh up your total monthly expenses when calculating or forecasting the amount of income protection that you and your family will need. If your estimate ever changes, you can increase or lower your level of cover accordingly.
Here’s an example of the costs that a normal Australian household must factor in:
- Mortgage repayments or rent
- Utilities (electricity, gas, water)
- Other household running costs like groceries
- Loan repayments
- Credit card repayments
- Medical bills
- Education costs
- Investment costs
- Car repayments including insurance
- Super contributions
Note: Income calculators are only a guide as to how much you may be able to spend on income protection insurance, so be sure to speak to an adviser about a suitable level of cover before jumping in. Here are some extra tips to keep in mind when using an income protection calculator:
- Choose a benefit period suitable to recovery from a disability
- Identify the percentage of your salary that will keep you financially stable as you recover
- Understand all inclusions and exclusions before signing on to ensure you’re covered correctly
Is income protection tax-deductible and free of GST?
Salary continuance policies are generally tax-deductible, but this differs between insurers. The best way to make sure that this is the case is to speak to an adviser about tax strategies aligned to the insurance measure.
Normally you can claim back expenses for paid premiums, but benefits received are tax assessable. To claim back on tax, you need to lodge all payments made for premiums and any benefits paid while off the job. Income protection policies taken out through a superannuation fund are not tax-deductible.
The premium you pay for your income protection policy can vary greatly between insurance brands; that’s why you must ensure you’re across all included and excluded features. Your current and future needs are unique, so it’s important to remember that there is no one-size-fits-all policy.
Extra features will cost you more, but they could also pave the way for a more comprehensive cover that sees yourself and family members safeguarded when you can’t work due to injury or illness. Here’s a list of some features you may want to select to enhance your salary continuance cover.
Can I combine income protection with other policies?
Income protection can be standalone or bundled with other policies such as:
- Life cover
- Total and permanent disability insurance (TPD)
If you die and have an income protection policy combined with life insurance or TPD, your loved ones will receive a portion of your monthly insured income. If you are totally or permanently disabled, you’ll receive a lump sum payment, but it’s vital to understand that this varies between insurers.
You also have the option to take out income protection through your superannuation account. While being a cheaper and more affordable option, there is a longer waiting period before benefits are received. There is also less flexibility to change your policy if your individual or personal circumstances change. Income protection through super sees your premiums taken directly from your retirement fund and your benefits paid directly into it – you may not have access to the financial support when you need it. This is explained more in the next chapter.
You can take out an income protection policy through your superannuation fund. However, despite the option being the cheapest, your level of cover is restricted compared to a private policy. An income protection policy through super can have its advantages – premiums are paid by your super contributions, so it can free up your cash flow.
If you choose to link income protection to your superannuation, it will generally be an indemnity-based contract, so the downside is your fund will adjust your benefit to your income at the time you make a claim.
What are the main limitations?
Superannuation funds have limited features, less flexibility and a longer waiting period. Here’s a list of how it differs to a private income protection policy.
- Complex claims process. When you receive a benefit through your super fund, the payment is directed to the trustee or fund and not directly to your bank account. This means your cash flow could be impacted until you have access to the funds.
- Limited duration and amount of cover
- Basic cover without much options to upgrade. Generally, cover is only optional for up to two years. They also don’t provide as many benefits for injury or illness.
- Retirement savings pay for income protection premiums. Superannuation funds use money saved in your retirement fund to pay for premiums, so ultimately your cash stash will slowly dwindle.
What are the benefits of income through super?
- Income protection through super generally costs less. If you link income protection to your super fund, it’s less costly because you’re not being assessed on your individual circumstances and added risk.
- Lower tax rate on payouts. You are paying for income protection through super with your own contributions, which have been taxed at the super contribution rate of 15%. On the other hand, a private policy will see your premiums paid from post-tax earnings, meaning you could pay a rate up to 45% when receiving a payout.
- You are automatically accepted. Given superannuation is a group fund comprising of not just a sole paying member, you don’t have to sit a medical assessment.
- Automatic cover. Due to super funds providing a form of group cover, there is no restrictions to your occupation – despite the risk of injury sometimes being higher. Smokers will also pay the same rates as those who don’t.
Do I choose super or a standalone policy?
It’s essential to weigh up your own individual circumstances when pursuing an income protection policy – either through a private fund or your superannuation. For people with a steady cash flow, a policy outside superannuation tends to be the more suitable option.
For clients with an unsteady or uncertain cash flow, like small business owners or those just starting out in the workplace, a policy through superannuation is likely to be the better option. This is down to the cost advantage, and also the ability to increase super contributions down the track.
It’s essential to compare a wide range of insurance providers. For a general overview, below is the average life insurance premium
Your lifestyle and individual circumstances will impact the cost of your income protection policy. Ultimately, your occupation is a factor that will be assessed – this is down to each job or workplace varying in the amount of risk you could incur, therefore increasing the potential for you becoming injured or sick.
How much risk does your job carry?
The level of risk or danger that your job entails can exacerbate the cost of your income protection policy. When devising a suitable policy for your needs, insurers will place occupations into two categories to determine your risk of having an accident or illness linked to your job. They are usually split into what’s called standard and special risk. Typically, the likelihood of being injured or becoming ill associated with your work varies, and depending on which category you fall into, your premium and benefit amount will differ.
Note: Table above is a sample guide. Each brand will have different methods of categorising and accessing the risk of your occupation.
Key considerations in regards to occupations
- Which income protection policy suits my career? To ensure your salary continuance is optimal for your future needs, there are certain things to keep in mind when considering taking out a policy. Here’s a list of some tips to follow.
- Get in early. Age is a major component that insurers will look at when you sign on to an income protection policy. Your risk of suffering an injury or illness is assessed at the time you take out your policy.
- Don’t withhold medical information. You must be honest and disclose all relevant medical information to your insurer. If you fail to do this, your fund has the right to reject any claims and suspend your income protection policy. It’s a good Idea to be honest about any pre-existing medical conditions – this will help you understand whether you will be covered, and if there are any added inclusions or exclusions you need to be aware of.
- Choose a premium that you can afford. There are three types of premium structures you can choose from to suit your financial and career circumstances.
- Stepped premium. The cheaper option at the start. The structure provides more affordability in the short term, but as you age the cost increases. This is down to the risk of health issues arising as you age.
- Level premium. Rewards you for loyalty. It’s a lot more expensive at the start of the policy, but when you reach 50 years of age, your premium drops and it becomes the cheaper option.
- Hybrid premium. This is a combination of the two. Here you pay a higher premium in the first decade, but then the policy reverts to a fixed rate.
If you have an uncertain career or employment future, stepped premiums are the way to go, as you’ll have the ability to pay a cheaper premium in times of uncertainty. If your future career and financial position is sound, a level premium or a hybrid premium are generally the way to go.
Australians are hesitant to take out income protection insurance, but taking out a policy should not be seen as a financial burden. People push salary continuance to the back of their minds because being out of work and being unable to provide for your family is a scary thought. However, income protection provides a certainty that you will see a percentage of your wage or salary coming in if you’re injured or ill. It also provides peace of mind that your family will continue to live as they always have, on what can sometimes be a long road to recovery.
When buying, remember, there are three types of salary continuance policies to choose from:
- Indemnity value insurance. The cheapest option. It pays a monthly benefit for your injury or sickness at the time you lost your capacity to work. Your monthly benefit reflects any losses to your salary at the time you claim.
- Agreed value insurance. Here your premium is fixed at the time you take out your policy. It is more expensive but the cost won’t increase or decrease as you age, and provides you added assurance.
- Guaranteed value. This is basically agreed value insurance with an added term for insurers to pinpoint they have your earnings on file.
What’s the right policy for me?
You can select the right income protection policy for your specific needs by speaking to a financial adviser, and reading your product disclosure statement (PDS) thoroughly. This helps you gauge what’s on offer in terms of premiums and included and excluded benefits. It also helps you to forecast and calculate your future financial costs, and lock in your budget.
Make sure you're aware of the following factors when searching for a policy that suits your needs.
- Definitions of incapacity and included and excluded benefits
- The cost of the policy
- Waiting periods and benefit periods
- Don’t over-insure
- Select the right policy for your circumstances
If you have limited savings and feel your bank account could be drained, give income protection another thought. Given that the current market surrounding income protection is significantly under-utilised, it’s the perfect time for clients to find a policy at a competitive rate.
It’s critical you compare income protection quotes, and evaluate what your current and future needs will be before signing on to a policy. There are certain questions you can ask financial advisers or your chosen insurer before starting your policy. They include:
- What is included and excluded benefit-wise?
- Am I covered for my pre-existing condition?
- How does my occupation impact my premium and benefits?
- What risk category do I fall into?
- How much compensation will I receive post-claim?
- After I claim, how much will my premium be?
- Do premiums continue to rise as I age?
- What are the waiting periods and limitations?
What are key features I should compare?
There are a number of essential features and extras that could enhance your income protection policy. They are as follows.
- Waiting periods. This is the time you are forced to wait after a claim for compensation following an accident or injury, before you receive a benefit.
- Benefit period. This is the length of time that your policy will substitute your income for. You can generally select a two- or five-year policy, or one that lasts until age 65. Some insurers offer an extended benefit period up to the age of 70.
- Index-linked premiums. Here your premium rises aligned to the Retail Prices Index measures of inflation. This ensures that the sum insured holds its value throughout the term of your policy.
- Guaranteed future insurability. This is an option within a life insurance and income protection policy. It gives you the ability to increase or refresh your cover. Most policies will allow you to use this to lift your level of cover once a year – with no medical history or current assessment needed. This can be an option for those with changing circumstances – for example, buying a home, taking out a mortgage, or for families with children.
- Non-cancellable policy. This is a safeguard to stop the insurer from cancelling or lifting the cost of your premium, or reducing your benefits – as long as you comply with all the terms set out in your contract.
- Coverage after death. This could be the difference between your family staying afloat or not, if you die. Benefits will continue to be paid to your dependents.
- Needle-stick cover. If you’re a medical professional, this form of additional benefit will provide cover for needle-stick injuries resulting in HIV or hepatitis.
- Continued superannuation contributions. Normally your super contributions are cut when you’re off work, but this feature allows them to continue. This means your retirement fund will continue to be filled with cash.
Just in case you need some more information, check out our frequently asked questions page to see if we can answer your query or concern.
If you’re still not confident about finding a suitable income protection policy, or have any further questions about how a policy could suit your needs, read through our frequently asked questions to see if we have the right answer.
Now that you have read the finder.com.au Beginner’s Guide to educate yourself on how income protection can help you, here’s a pop-quiz to see how much has sunk in.
Q: Let’s start by testing your knowledge with some true or false statements.