Income protection insurance is a financial safety net if sickness or injury stops you from working. It pays out part of your usual income, so you can keep up with everyday expenses.Â
Income protection typically covers 70-75% of your income if illness or injury prevents you from working.
Pre-existing conditions and mental health issues often face stricter criteria or longer waiting periods.
It provides a crucial safety net for self-employed people and primary household earners.
What does income protection cover?
Income protection insurance covers a portion of your regular income if injury or illness prevents you from working. Typically, the benefit can last up to five years but some insurers may offer cover until you reach age 65 - regardless of how long that takes.
A broad range of illnesses and injuries are covered by income protection insurance, but all require official diagnoses from a qualified medical professional, along with evidence to support any claims of your inability to work.
Some examples that may be covered include:
Physical injuries, such as broken bones, burns, or loss of limbs
Neurological injuries, such as stokes, seizures, or traumatic brain injury
Diseases and viruses, such as cancer, multiple sclerosis, or COVID-19
Mental illnesses, such as anxiety, OCD, or PTSD.
In many cases, cover for mental illnesses or conditions may be subject to a longer waiting period and pre-existing conditions may be subject to stricter criteria, or excluded altogether. Always check your PDS or speak with your chosen insurer to be sure.
What income protection doesn't cover?
There are some conditions or situations that are never, or extremely rarely, covered by income protection insurance. These include:
Pregnancy: Normal and uncomplicated pregnancy, childbirth and miscarriage, including multiple births, pregnancies via IVF, and normal morning sickness.
Self-harm: Any intentional act of self-harm, including exposing yourself to an unreasonable level of risk. This could include ignoring doctor's orders or participating in extreme sports without adequate safety equipment.
Drugs and alcohol: Injuries or illnesses acquired while under the influence of drugs or alcohol. For example, falling and breaking your leg while drunk.
Overseas travel against advice: Any injuries or illnesses sustained while in a country that DFAT has issued a 'Do Not Travel' warning advisory for.
Criminal activity: Sickness or injury that occurs as a result of a criminal offence, or attempted criminal offence, isn't covered. For example, breaking and entering or street racing.
This list is not exhaustive and you should check your PDS carefully to understand what is and isn't covered by your policy.
How much does income protection pay out?
You can customise the amount your income protection policy pays out, and how long for, although there are some general limits that are important to keep in mind.
Benefit amount: Typically 70-75% of your regular income, but you can opt for less if you prefer.
Benefit limit: Payment limits typically range from a maximum of $10,000-$30,000 a month.
Benefit period: Most brands have a maximum benefit period of five years, but some offer cover up until you reach 65. You can also reduce the benefit period if you prefer.
Who needs income protection?
Income protection insurance is worthwhile for lots of people, including:
Self-employed people: Without worker's compensation or sick leave to rely on, income protection is a valuable safety net for self-employed people,sole-traders, and contractors.
Primary earners: If you are the sole or primary breadwinner in your household, the loss of your income could have a major impact on your ability to keep up with everyday expenses.
People with dependents: If other people rely on your income, such as children or partners, income protection insurance offers a safety net for both you and them.
People with financial commitments: Anyone with financial commitments - such as a mortgage, lease, or personal loan - who relies on their income to make repayments.
How to choose the right income protection policy
Choosing the right income protection policy for you will depend on your current financial situation, the level of support you get from others, and your existing obligations. When deciding which policy might be right for you, consider the following:
How long is the waiting period?
What is the potential benefit amount?
What is the benefit period?
How much are the regular premiums?
How are mental health conditions covered?
How are pre-existing health conditions covered?
Can you make changes to cover as your personal situation changes?
What are the exclusions?
What other benefits are offered by the insurer?
How income protection is different to WorkCover
The most significant difference between income protection insurance and workers' compensation is that workers' compensation only applies to work-related injuries or illnesses. In contrast, income protection insurance applies to injuries and illnesses that occur both in and out of the workplace, offering far broader protection.
Feature
Income protection
WorkCover
Cover for work-related injuries and illnesses
✅
✅
Cover for illnesses and injuries outside of work
✅
❌
Cover for mental health
✅
✅
Available for self-employed people
✅
❌
Provided by employers
❌
✅
Customisable benefits
✅
❌
Our expert says
"Income protection insurance can prevent you from falling into debt, or blowing through your life savings, if you're suddenly unable to work. Perhaps more importantly, it could also give you the freedom to take extended time off work, so you can focus on recovery, rather than trying to balance earning a living with getting better."
Sam works full-time as a chef and owns her own apartment. One evening, while on a run, she trips and breaks her ankle, requiring surgery. Afterwards, the surgeon tells Sam she should not return to work for three months.
Sam only has emergency savings to last around one month and nobody to help cover her mortgage repayments. Thankfully, she has income protection insurance. After a 28-day waiting period, Sam's income protection policy begins to cover 75% of her income.
Not only does the policy help Sam keep up with regular expenses without draining her savings or falling into debt, it also gives her the ability to take the entire three months' off work, as recommended by the doctor.
This is a fictional case study for demonstrative purposes only.
FAQs
There are some disadvantages to income protection insurance to be aware of. For example, policies can be costly for people with high-risk jobs or lifestyles, any payments received are subject to tax, mental health and pre-existing medical conditions may be subject to stricter criteria, and your insurer may require regular, ongoing health evaluations or participation in rehabilitation programs if you do ever make a claim.
For many people, income protection insurance is definitely a worthwhile investment. If you rely on your income to cover your rent or mortgage, to pay for everyday living expenses, or to cover childcare costs, you could find yourself in extreme financial hardship if you were suddenly without an income.
It's possible that income protection insurance would cover leave due to stress, but it would require a diagnosis from a qualified medical professional as a mental health condition that prevents you from working. It also depends on the policy you choose and any mental health exclusions or waiting periods that are applied to your policy.
Generally, income protection insurance does not cover redundancy or termination. However, some insurers may offer an additional option that pays a portion of your regular income if you are made redundant or your business becomes insolvent - this is sometimes called involuntary unemployment cover.
Nicola Middlemiss is a journalist with nearly a decade of experience in personal finance and insurance. She has contributed to Domain, Yahoo Finance, Money Magazine and Insurance Business Australia, offering in-depth insights into commercial insurance in the Australian market. Nicola holds a Bachelor’s degree in English from the University of Leeds and a Tier 1 General Insurance (General Advice) certification, which complies with ASIC standards.
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Income protection provides you with income replacement for sickness and illness but not for pregnancy. However, it does offer features to help you out during pregnancy.
Salary continuance and income protection both serve to replace income in the event of injuries and illness. However, there are some key differences to know about.
Find out how much your income protection insurance policy will pay out in the event of a claim. Receive quotes for income protection and apply securely.
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