Can you have multiple income protection policies?

How do 2 income protection policies work?

Income protection benefits are capped at 75% of your income. This means if you have two income protection policies and claim on both, your total payout from both will still equal 75% of what you earn. So by having more than two policies, you may be paying for benefits you won't receive. This doesn't mean that you shouldn't have more than one though.

What are zombie insurance policies?

In 2018 the Productivity Commission published a paper about the number of Australians that have useless insurance policies, known as 'zombie' policies. You know, because they're actually dead, even if they look alive? It's actually very funny for the Productivity Commission, they're normally quite dull.

Anyway, one of the biggest forms of zombie insurance included multiple income protection policies, mostly stemming from Australians that have multiple superannuation accounts. It's always a good idea to try and stick to a single super account, and to ideally limit the number of income protection policies you have.

Why have more than one income protection insurance policy?

People choose to have multiple income protection policies to help them manage short- and long-term financial loss that might be caused by illness or injury. A common strategy is to:

• Receive cover in the first 2 years of disability with one policy that pays a reduced benefit (60% of income for example)
• Then combine it with a policy that has a 2-year waiting period that pays (75% of the insured person's income for to age 65 for example).

What is the maximum benefit amount that I can receive with income protection?

The benefit amount that you can insure with Australian income protection plans is up to a maximum of 75% of your gross annual income. Your annual income may include:

• Salary
• Commissions
• Bonuses (you may need to provide proof that you have received them three years in a row to be eligible)
• Overtime payments
• Reportable fringe benefits
• Superannuation contributions

Some insurance providers may offer an excess of up to 15% in cover; however, the additional amount must be used as superannuation contributions.

Why am I only covered for up to 75% of my income?

You are only covered for up to 75% of your income because there should be an incentive for you to want to return to full-time employment when you have fully recovered. Income protection should be treated as a form of support while you are temporarily disabled, so you have the financial capability to cover basic necessities and maintain your family's lifestyle.

When will income protection payments be reduced?

In Australia, income protection is designed to cover a percentage of your income. Insurers will generally cover up to 75% of your income to incentivise you to return to work. This usually means your combined amount would be capped at that percentage.

What other income sources can reduce income protection payments?

Income protection inside super vs outside super

If you have two income protection policies – one within your superannuation fund and another outside super, the limitation on the benefits you receive each month will still apply. However, some super funds may offer an extended waiting period feature, which allows you to receive the benefit payments from your income protection policy inside super, even when you have another cover in place with your other insurance provider.

You may choose to receive your benefits at the end of your super policy waiting period. However, with extended waiting period, you may receive your payments from the policy inside super fund once the benefits from the other insurance provider cease. You must continue to be disabled to receive the benefits.

It is important to note that not all superannuation fund offer this feature. Consult with your respective super fund if you have any doubts with owning multiple policies – inside and outside superannuation environment.

How do insurance providers know if you have multiple income protection policies?

Insurance providers are able to share information about customer's claim histories and so it is important to disclose any relevant information, including whether you have existing policies. If an insurer discovers that you have not disclosed information such as this, your claim payout may be impacted negatively.

As such, it's important to be completely honest with the details that you submit in your claim. This could include other policies, but also other compensation you've received, like from workers comp. Otherwise you risk losing your payout, or could even put yourself at risk of fraudulent behaviour.

Frequently asked questions

• Are income protection payouts from multiple policies taxed?

  Yes income protection benefits are generally considered taxable income by the Australian Tax Office. This means that any payments you receive from one or more income protection policies may be subject to income tax. It is always a good idea to seek advice from a qualified financial advisor or tax professional to understand your specific tax obligations.

• How do premiums work if I have multiple income protection policies?

  You will pay premiums for each separate income protection policy you hold. While you might pay premiums for two or more policies, the total benefit you can receive across all policies is capped at 75% of your income. This means you could be paying for a higher total benefit amount than you are eligible to receive, making some of your premiums redundant.

• What happens if I want to cancel one of my income protection policies?

  If you decide you no longer need one of your income protection policies perhaps because you are overinsured or have a 'zombie' policy, you can contact the insurer directly to cancel it. Be aware that cancelling a policy may have implications for your overall cover and premium costs so it is wise to review your remaining cover to ensure it still meets your needs.

• How does a change in my income affect my multiple income protection policies?

  If your income changes significantly you should inform your insurers. Income protection policies typically base their benefit calculations on your gross annual income at the time of claim. If your actual income is lower than the amount you are insured for across multiple policies your total payout will still be capped at 75% of your current income potentially reducing the value of holding multiple policies.

• Can I have both an employer sponsored and a personal income protection policy?

  Yes, you can hold both an employer sponsored income protection policy and a personal income protection policy. However the 75% cap on your total income replacement still applies across all your policies. This means that the combined payouts from both your employer sponsored and personal policies will not exceed 75% of your gross income.

To make sure you get accurate and helpful information, this guide has been edited by Tim Bennett as part of our fact-checking process.

Written by

James Martin

Journalist

James Martin was the insurance editor at Finder. He has written on a range of insurance and finance topics for over 7 years. James often shares his insurance expertise as a media spokesperson and has appeared on Prime 7 News, Insurance News, 7NEWS and The Guardian. An experienced journalist, James' work has featured in publications including The Irish Times, Companies100 and In Business. He holds a Tier 1 General Insurance (General Advice) certification and a Tier 1 Generic Knowledge certification, both of which meet the requirements of ASIC Regulatory Guide 146 (RG146). See full bio

James's expertise

James has written 181 Finder guides across topics including:

• Car, home, life, health, travel and pet insurance
• Managing the cost of living
• Money-saving tips