Although income protection is not a "one size fits all" product, it's possible to find policies that stand out because of their features. We looked at waiting periods, percentage of your income covered, and age limits to help determine what might be the policy with the best income protection.
Product feature scores based off OmniLife research in January 2019. Not all products in the market are covered by the research. Scores are subject to change and will be reviewed by finder over time.
How to find the best income protection insurance
We broke down finding the best income protection insurance policy in a detailed walkthrough.
Here's the quick version:
Benefit periods. Work out how long a policy replaces your income for vs how long you need.
Waiting periods. Find out how long you'll wait before cover kicks in vs how long you can wait.
Max cover. Compare the maximum amount of cover you can apply for vs what you actually need.
Cover type. Decide between "agreed value" and "indemnity value" cover.
Cost factors. Understand what affects the cost of your policy.
Premium type. Choose a premium type that suits you.
That’s why you’re here, right? The good news is that’s why we’re here too. We know you don’t want to. After all, these documents can be upwards of 100 pages and they’re definitely not page turners.
To help you out, we’ve done the hard yards and broken down these documents into digestible pieces, so you know what’s covered. However, before you to choose a policy you really should look through the policy for yourself to make sure there isn’t any fine print you don’t want to agree to. It’s just common sense. But we’ve got your back there too.
This section takes you step-by-step through an income protection policy document, to help you quickly find out whether the cover makes sense. For this example, we decided to look at a product disclosure statement (or PDS) from a popular Australian brand: Virgin Income Protection Insurance.
Step 1: Find out how long your income will be replaced for (benefit period)
It's important to be aware of how long your benefit will last. This is often called a "benefit period".
Virgin phrases it as "How long will my benefit be paid for" in its PDS. This PDS included a high level summary of its key features on one page.
Individual policies will vary; as shown in the example above, Virgin offers:
Quick & Easy Policy with 6, 12 or 24 month benefit periods
Tailored Policy with the same but up to a 5-year benefit period as well
The longer the payout period, the higher the monthly premiums will be. Note: some policies will only offer coverage up to the age of 60, 65 or 70.
Step 2: Work out how long a payment takes to kick in (waiting period)
A waiting period is the time between when you stop work and when you will receive your first benefit. The length of this period varies depending on the policy and can range anywhere from 14 to 720 days.
Here's the key difference between short and long waiting periods:
Step 3: Find out the maximum cover you're eligible for
Thankfully, it’s easy to estimate a coverage number when you apply for income protection insurance. Since payout is up to 75% of your income, use this calculation to find the number.
Income protection amount per month = (current annual income) x (.75) / 12
So, for an annual income of $75,000, the maximum monthly benefit would be $4,687.50. The PDS might also state a max income benefit per month too, so it's a good idea to check there if you have a high income.
Virgin has up to $10,000 available per month.
Step 4: Decide between agreed and indemnity value
There are two ways income protection can cover your income: agreed and indemnity value.
Agreed Value. In an agreed value structure, the payout is based on your income at the time you apply. Agreed value polices allow you to know exactly how much you’ll be getting as a benefit. However, the premiums are higher. Agreed value is a good choice for self-employed or small business owners.
Indemnity value. An Indemnity value policy pays out based on your income at the time of the claim. Indemnity has lower premiums because it fluctuates with income. This structure works best for those who may receive benefits from other sources if they become sick or injured, or those who cannot afford the higher premiums of an agreed-value plan.
We couldn't find any mention of agreed or indemnity value income protection in the Virgin PDS so we gave them a call. You can select your income (agreed value) without proof of income for any amount under $3,000 per month.
Step 5: Understand what contributes to your premium
The premium you pay for income protection insurance can change based on a few factors.
In general, factors can include:
Age. Cost can increase with age while coverage may decrease.
Gender. Women generally have higher premiums because they are considered to be more susceptible to certain medical conditions.
Pre-existing medical conditions or illnesses. Insurers will need to know medical details and current treatments.
General health. This includes factors like obesity and blood pressure.
Whether you are a smoker. If you are a smoker you will pay a higher premium.
Occupation. High-risk jobs will have higher premiums compared to low-risk jobs.
Lifestyle. Potentially dangerous hobbies like racing, playing contact sports or frequent travel to underdeveloped countries can raise premiums.
Waiting period. A shorter waiting period will be more expensive than a longer one.
Payment frequency. Paying a premium annually instead of monthly can bring discounts.
To illustrate this, consider two people who have similar occupations, ages and lifestyles, and are generally healthy. If the only difference is that one person is a smoker, the cost of income protection could rise by up to 50%. To level the costs, the smoker may have to increase the waiting time for benefit payout, have a shorter overall payout period, or decrease the payout age limit from 65 to 60.
Virgin lists premiums in its general information section as Virgin combines its income protection and life insurance policies together. Look for words like "cost", "affects" and "premium" to find the right PDS section when researching. Alternatively give the insurer or your adviser a call.
Step 6: Choose a premium type that suits your preferences
There are three premium structures that affect how much you’ll pay for cover: stepped, level and hybrid premiums.
Stepped Premiums. A stepped premium starts out cheaper but increases over time as you grow older.
Level premiums Level premiums start out higher than stepped premiums but will remain consistent throughout the lifetime of the policy.
Hybrid premiums Hybrid premiums are a combination of both stepped and level premiums.
Virgin doesn't explicitly state these terms; however, it does mention that your premium will generally go up each year. This implies a stepped premium but as always, check with the insurer.
The dangers of comparing a policy just base on price
A common pitfall is to just buy the cheapest policy. Sure, it'll save you money in the short term but it could cost you big in the long run. I mean, you're already considering buying insurance, so don't half-arse it. It's like building a moat around a castle but cheaping out on the drawbridge, sure the moat is going to keep you safe but if the bridge breaks it'll trap you.
How to know the difference between a good and bad income protection policy
What does a quality income protection policy include?
When you’re choosing an income protection policy, the following features will give you an indication of the overall quality of each plan:
Coverage for a wide range of illnesses or accidents. This can be found in the product disclosure statement (PDS) of your insurance policy.
Clear definitions of disabilities. Most policies will pay when a disability prevents you from working so make sure what is considered a disability is made clear from the start, eg own vs any occupation definitions.
Premium waivers. Ability to waive premiums while receiving benefits.
A shorter waiting period. A 30-day waiting period to receive benefits is a good number to look for as a balance between quality and cost.
Choice of benefit period. Ability to choose how long you want to receive the benefit with clarity on how much it costs.
Additional benefit payments. These include in-home care, accommodation or travel cost and reimbursement for family care.
Occupation-specific benefits. One such feature is needlestick protection which adds cover in situations where HIV or hepatitis is contracted while carrying out nursing or doctoral duties. Other occupation-specific plans can offer special coverage for work-related injuries in construction or labour.
What does a bad income protection policy include?
Just as important as looking for markers of a high-quality policy, it is vital to be aware of common hallmarks of a less desirable policy.
A policy that is unaffordable in the future. Beware of the trap of premiums that rise with your age as they could become unsustainable when you’re older. Look to decrease your cover if your needs change later on in life.
A longer waiting period than similar-priced policies. If the waiting period is long and you are paying a higher premium compared to similar policies, it’s worth reassessing.
A short benefit period compared to similar-priced policies. If you are paid out for a shorter time when compared with similar-priced policies, take a second look.
A policy that doesn’t notify you of an automatic indexation. While indexing helps you increase your sum with inflation, it can be a shock to the wallet if you unknowingly accept an automatic increase.
One of the best reasons to take out income protection outside of super premiums are tax deductible.
Income protection is tax deductible if the benefit is paid in regular instalments and replaces a regular income, and if the benefits are treated as income by the Australian Taxation Office.
How do I get a great policy but not pay too much?
Keep the following tips in mind when looking for a policy that offers both affordability and competitive features:
Choose an appropriate waiting period. Ask yourself how long you would be able to manage your ongoing expenses if you were out of work. If possible, use this information to choose a longer waiting period and lower the price of cover.
Choose a shorter benefit period. The longer your benefit period the more you will have to pay for cover, so if you can afford to do so, consider selecting a shorter benefit period.
Consider an indemnity value policy. Indemnity value policies are usually cheaper than agreed value policies.
Choose your premiums. If you’re taking out cover for an extended period of time, level premiums will usually be a cheaper option. On the other hand, stepped premiums can work out to be more affordable if you only want to have your policy in place for a few years.
Stop smoking. It's much easier said than done. However, your smoking status has a huge impact on your insurance premiums. Check out our guide to quitting smoking.
Shop for discounts. Keep an eye out for multi-policy discounts, combined cover discounts, large sum insured discounts and savings for paying premiums annually rather than more frequently.
Review your policy regularly. You may need to decrease your level of cover or you may find that there is another policy available on the market that offers better value for money.
Compare policies. Don’t just select the first policy you come across; compare the options from several insurers to see how they stack up against the competition.
Ready to start comparing income protection?
Purchasing income protection is by no means a straightforward process and it’s easy to get bogged down in the different policy options, benefits, payment structures and add-ons. An insurance consultant can help you assess your situation to find cover to meet your needs while keeping within your financial means.
Checklist: Questions to ask yourself before you buy
Agreed value or indemnity value? Agreed value policies pay a benefit based on your income at the start of the policy, which means the level of cover you receive is not affected by any fluctuations in your income. An indemnity value policy is cheaper and requires your income to be verified at the time you make a claim, so it may be affected if you have an unsteady income. This can be a more suitable option for self-employed workers.
How long will benefits last? The benefit period of your policy can be for up to two or five years, or you may continue to receive a benefit until you reach the age of 60 or 65. The more you pay for your policy, the longer the benefit period will generally be.
How much cover do you need? You will need to calculate how much income you will need to continue to meet all of your ongoing expenses and provide for your loved ones while you are unable to work.
How much does it cost? Your premiums are affected by your age, gender, health status and pre-existing medical conditions, smoking status, occupation, waiting period and the policy you choose. Premiums will vary between insurers so it is worth comparing a number of different options.
Stepped or level premiums? Stepped premiums start out cheaper but rise as you age, while level premiums are determined based on your age when you take out a policy but then remain the same. Level premiums will be more expensive to begin with, but if you’re taking out cover for a long period they will eventually be a cheaper option.
What is the waiting period? This is the amount of time you will have to wait after suffering your illness or injury before you can receive a benefit. These commonly range from about two weeks to one month.
What about if I become unemployed or am retrenched? Unemployment and retrenchment are not included in cover, but some policies will suspend your premiums while you are out of work.
Are the benefits indexed for inflation? Make sure that your policy is automatically indexed in line with the rate of inflation. This will ensure that you maintain an adequate level of cover over the life of the policy.
Can the policy be cancelled? Look for a policy that is non-cancellable, which means that it will be renewed by the insurer every year regardless of changes to your health or whether or not you make a claim.
What age restrictions are applied? Check to see whether a minimum and maximum entry age apply to your policy. Is there an age when cover expires?
Bundle cover? Can you combine your income protection policy with another form of life insurance if you wish?
What are the built-in features? Are benefits like guaranteed future insurability and automatic indexation built into your policy?
Is a medical test required? Will you need to undergo any medical tests before you can be approved for cover or will you simply have to answer a few health questions?
How are your conditions covered? How does the insurer treat pre-existing conditions? Will you still be eligible for cover and if so, what sort of special requirements (medical tests, premium loadings etc) will you need to meet?
Can you adjust your cover? Can you adjust your level of cover at any time? What sort of information will you need to provide when you wish to do so?
Review your policy regularly. Your life and therefore your insurance needs are changing all the time, so it’s important to review your policy each year and check whether it still offers adequate protection.
Are they financially secure? It’s important to know if an insurer will be able to meet all its financial obligations to policyholders, so check its financial rating to make sure there will be no issue when it comes to paying out your claim.
Do they have a long, stable history? Research each insurance provider to find out more about its history and experience in the industry. Make sure you’re dealing with a registered financial institution that understands all the ins and outs of the life insurance business.
Is there a range of policies on offer? There’s certainly no shortage of life insurance companies in Australia, so it’s important you choose one that offers policies that meet your cover needs.
Does it have a reputable customer service team? You can tell a lot about an insurer simply from the response you get when you call them. Life insurance is a critical expense for many Australians so you need to know that support and advice will be on hand whenever you need it. Look for companies that offer multiple support options (phone, email, online) and compare the hours during which that support is available.
Is it value for money? Compare all the features and exclusions on an insurer’s policies to work out if you are truly getting good value for money. Cover from a certain insurer might be affordable and even cheap, but if it doesn’t offer all the features you want then is it really worth it?
Is there a straightforward claims process? Look at the claims process that each insurer offers and ask yourself how easy it will be to place a claim. Will help be on hand every step of the way? How do the insurer’s other customers rate its claims handling process?
Is there proven customer satisfaction? The levels of satisfaction of previous customers offer an excellent gauge as to the quality of a life insurance provider. You can find plenty of reviews and ratings right across the Internet – just remember not to place too much importance on any one review.
*The products compared on this page are chosen from a range of offers available to us and are not representative of all the products available in the market. There is no perfect order or perfect ranking system for the products we list on our Site, so we provide you with the functionality to self-select, re-order and compare products. The initial display order is influenced by a range of factors including conversion rates, product costs and commercial arrangements, so please don't interpret the listing order as an endorsement or recommendation from us. We're happy to provide you with the tools you need to make better decisions, but we'd like you to make your own decisions and compare and assess products based on your own preferences, circumstances and needs.
Will Eve is the lead publisher of the global team at Finder. He was previously the group publisher for insurance for Finder Australia. Will has a Bachelor of Communications from the University of Technology Sydney. He loves the challenge of launching Finder into new markets while helping grow Finder’s global team.
It’s possible for income protection to pay a portion of your usual income if you’re temporarily unable to work because of health issues. Similarly to TPD cover, mental illness is a significant contributor to these types of claims.
You may want to discuss the history of the mental illness with your insurer to clarify the extent of the cover.
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does income protection covered mental illness
Hi Jeet,
Thank you for your inquiry.
It’s possible for income protection to pay a portion of your usual income if you’re temporarily unable to work because of health issues. Similarly to TPD cover, mental illness is a significant contributor to these types of claims.
You may want to discuss the history of the mental illness with your insurer to clarify the extent of the cover.
You may find more useful information on this page on Life Insurance, Income Protection and Mental Illness.
Best,
Maria