How does income protection work: beginners guide

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.

In this guide, we'll walk you through the basics and answer any income protection questions you might have.

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How does income protection work?

Income protection insurance works by replacing lost income when you're unable to work. If you can't return to your job due to an illness or accident, you should be able to rely upon the benefit while you're out of action to help you do the following:

Income protection is particularly useful if your job is your main or sole means of supporting yourself or if you have a family or own a business.

The majority of insurance claims lead to a lump-sum payout where you receive the entire claim benefit all at once, minus tax. Income protection is different in that it provides an ongoing weekly or monthly benefit following an injury or illness that scales to your pre-claim income.

Income protection policies have a "waiting period" attached. This is the minimum amount of time you have to be out of work to start receiving benefits, usually between a month and three months.

Typically, you will receive 75-85% of your income for the duration of the policy or until you can work again, though you can always choose to receive less if you want to keep your premiums down. In addition, you can usually claim any premiums you pay for insurance against loss of income as tax-deductible.

What does income protection insurance cover?

While income protection insurance broadly covers you against being unable to work, not every reason for not working will allow you to claim. Here's what income protection does and doesn't cover:

• Inability to work due to illness or injury
• Significantly reduced ability to work due to illness or injury
• Prolonged or permanent disablement

• Redundancy (optional extra on some policies)

• Illness or injury lasting less than the policy's waiting period
• Disablement from mental illness
• 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 insurance?

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.

Compare income protection from these Australian brands

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Name	Product	Maximum Monthly Benefit	Maximum % of Income Covered	Maximum Benefit Period	Waiting Period Options
NobleOak Income Protection		$25,000	75%	2 years or to the age of 65	30 or 90 days	Get 2 months free when joining combined cover. Offer ends in April 30, 2020. T&Cs apply.	Get quote View details	Compare	loading Fetching your data...
Medibank Standard Income Protection		$7,500	75%	5 years	30 or 90 days	10% discount for Medibank health members & go into the draw for $1,000 Gift Card when you get a life insurance quote.	Get quote View details	Compare	loading Fetching your data...
ANZ Income Protection		$10,000	75%	5 years	30 or 90 days	Earn 1 Qantas Point for every $1 of premiums paid.	View details	Compare	loading Fetching your data...
Virgin Tailored Income Protection 2019 Winner		$10,000	85%	5 years	14, 28, 60, or 90 days	View details	Compare	loading Fetching your data...
AAMI Income Protection		$10,000	75%	5 years	14, 28, 60 or 90 days	View details	Compare	loading Fetching your data...
nib Income Protection		$10,000	85%	2 years	14 or 28 days	Get one month free when paying annually. T&Cs apply.	View details	Compare	loading Fetching your data...
Insuranceline Rate Saver Income Protection		$10,000	85%	5 years	14, 28, 60 or 90 days	Get a $100 bonus gift after 2 months. Plus, and get 12 months cover for the price of 11 if you pay annually. T&Cs apply.	View details	Compare	loading Fetching your data...

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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

• Who can apply for cover?

  • Cover is generally available for Australian residents aged between 18 and 63 (age next birthday). The maximum age on some policies is 59.

• Can I get cover if I only work part time?

  • Generally, you will need to be employed at least 20 hours per week and to have been in the same job for at least 12 months. The benefit is based on your pre-tax income after other associated expenses have been taken into account.

• Can I get cover if I am self-employed?

  • Yes, provided you work for at least 20 hours per week and have been self-employed for at least 12 months. You will need to provide some form of evidence to the insurers surrounding your earnings.

• Can I get cover if I have a high-risk job?

  • This will depend on the nature of your occupation and the insurer that you choose. Insurers have different eligibility requirements for workers. It may be worth receiving help from an insurance consultant who can use their knowledge of the market to help you find a suitable option. Learn more about income protection for high-risk manual jobs here.

• How much cover do I actually need?

  • While most policies by default will provide you with a default level of cover of 75-85% of your income, you may be able to find cover with a reduced benefit amount. Consider what you would need to cover in the event that you were unable to work.
  • It's also worth noting that some insurers will only provide a maximum monthly benefit (such as $12,000 per month), so it's worth checking to see exactly what you are eligible for.

• Can I increase or decrease the level of cover I am eligible for?

  • Yes, you can choose to adjust your policy (depending on the policy/insurer you have chosen) or increase/decrease your premiums as you see fit.

• Can I take out cover on behalf of my partner if they work at home?

  • No. You are required to apply for cover individually. If your partner is a stay-at-home, you may be able to apply for cover and include what's known as a homemaker option. The insurer will also need to verify their details in order for cover to be put in place.

• Do I need income protection if I already have life insurance?

  • Life cover and income cover both offer protection for different reasons and both are worth considering having in place. Life cover provides a lump-sum benefit in the event you pass away or suffer a terminal illness. Income protection provides an ongoing monthly benefit while you are unable to work for an extended period.

• Do I still have to pay for cover if I am receiving the benefit?

  • No, you don't have to pay for cover if you are under claim.

• Can I cancel my policy?

  • Yes, you can cancel your policy at any time you choose.

• If I cancel my cover, will I receive any payment?

  • No. There is no surrender value if you cancel your policy outside of the cooling-off period.

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