Is Income Protection worth it?

For many Australians, our ability to earn an income is the basis of our financial safety net throughout much of our lives.

Income protection policies in Australia Compare your options
Key factors to consider Learn more

We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!

If your regular income is suddenly stopped due to an accident or illness, and for an extended period of time, it doesn’t take long for financial pressure to build up. Income protection insurance can be a lifeline in this situation, but there are a few other ways to cover your income you'll also want to know about.

What you need to know

  • Income protection can help to pay your bills and maintain your lifestyle if you can no longer work due to a sudden illness or injury.
  • It can also offer a number of useful extras, such as a partial disability benefit if you can return to work at a reduced capacity.
  • This type of insurance typically pays a regular monthly benefit, whereas other types of life insurance tend to offer a lump sum payout.

Is income protection worth it for me?

An easy way to test the value of income protection is to look at two things.

1. Think about how important your income is to your family

Australians rely on their income for various ongoing expenses. These include:

  • Mortgage and car repayments
  • Rent
  • household bills such as groceries, Internet and energy
  • Credit card repayments
  • Education costs for children

When income is taken away, it can prove devastating for any of us. Let's take a look at the leading causes of missed mortgage repayments, which underscores just how key our jobs and wellbeing are to our financial stability.

Leading causes of missed mortgage repayments

A Finder survey of 2,000 Australians asked people why they miss mortgage repayments. The main findings were as follows:

  • Sudden loss of employment was the leading cause (20% of missed repayments)
  • Injury (11%) and Illness (10%) were the third and fourth biggest cause (behind simply forgetting!)

2. Consider how income protection can protect you (along with your options)

If you are unable to work due to injury or illness and need to cover your debts you have a few options:

  • Your savings. You could draw from your existing savings.
  • Mortgage protection insurance. This is a type of insurance that solely covers mortgage repayments in the event of major illness or death.
  • Income protection. This is a policy that replaces part of your income and can be used to cover your mortgage, rent, other debts and ongoing expenses. Note: Income protection also has a range of extra features that come in handy during these moments.

Compare policies from Australian income protection brands

Name Product Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period Options
AAMI Income Protection
$10,000
75%
Up to
5 years
14, 28, 60 or 90 days
If you’re an existing AAMI customer, you can save 5% on income protection. New customers can get one month free by paying annually.
Insuranceline Income Protection
$10,000
75%
Up to
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.
NobleOak Disability Income Insurance
First 24 months: $30,000. Thereafter: $25,250
70% for the first 24 months, 60% thereafter
Up to
Age 65
30 or 90 days
With NobleOak, you can lock in a policy with a benefit period covering you up to the age of 65. Cover limits may go as high as $30,000.
Suncorp Income Protection
$10,000
75%
Up to
5 years
14, 28, 60 or 90 days
Sign up and become a member of Suncorp Benefits. Access savings of up to 15% from major retailers. Existing members can get a 5% discount off their policy.
RAC Disability Income Insurance (Only available in Western Australia)
RAC Disability Income Insurance  (Only available in Western Australia)
$30,000
70%
Up to
Age 65
30 or 90 days
When you purchase RAC Income Protection, WA residents receive complimentary RAC membership which includes access to discounts on fuel, savings on shopping, entertainment and more. T&Cs at rac.com.au.
loading

Compare up to 4 providers

Pros and cons of Income Protection: A summary

Pros

  • Income protection can protect you with payments of up to 70% of your gross monthly salary until you're fit to return to work
  • Some policies offer additional benefits to help you back on your feet, such as rehabilitation support. Other benefits of income protection can include childcare benefits and partial disability benefits. The latter can be activated if you return to work in a reduced capacity due to your sickness of injury
  • You may be able to enjoy tax deductions with your premium payments, as long as you buy your insurance as a standalone policy. Read more on income protection and tax here.

Cons

  • This insurance type caps its income replacement benefits – these are generally becoming more restrictive, as our news story explains
  • Since the pandemic, many insurers have stopped offering redundancy cover with new income protection policies
  • Insurance policies held inside your super won't be tax-deductible, as insurance premiums are deducted from your super contributions.

How is income protection different from WorkCover?

Both Income Protection and WorkCover can provide support in the event you suffer an illness or injury though there are key differences to be aware of that make both worth considering.

  • WorkCover. A form of workers’ compensation, WorkCover steps in to protect employees when they suffer an injury at their workplace. If an accident at work means you suffer a serious injury and are unable to work for a lengthy period, WorkCover provides compensation. However, your employer’s negligence will need to be proven in order for you to receive a payout, plus you are only covered for injuries incurred at work.
  • Income Protection Insurance. Covers you for injuries suffered both at work and outside the workplace, which is very important when you consider that accidents can occur while a person is at home or participating in recreational activities. Income protection also provides cover when you suffer from a wide range of illnesses.
Cover for injuries and illnessesWorkCoverIncome Protection
Inside work
  • Yes
  • Yes
Outside of work
  • No
  • Yes

Won’t my sick leave cover me?

Your cash stash could take a hit if you rely on sick leave instead of taking out income protection insurance. Sick leave provides employees with cover for days when they can’t get out of bed or for other illnesses, but the time frame is limited.

IPI covers individuals for a wide range of illnesses and injuries until they’re fit to return to work. Sick leave should be viewed as minimal cover to provide protection for time off.

The key difference between sick leave and Income Protection:

  • Sick leave only allows 10 days of paid cover for full-time employees, and there is no cover after this time.
  • Income Protection typically covers up to 70% of your gross monthly income until you return to work.

Another issue when it comes to relying on sick leave is you have to accumulate leave during a year of work. It starts to build up from an employee's first day, and is based on the number of hours they work. The balance does carry over to the next year, but if you use all your leave, you’ll find yourself out of pocket.

Case study: How can income protection come in handy during a tough time?

Finder spoke to a 56-year-old legal professional who was able to access Income Protection at her most vulnerable.

Germaine was diagnosed with breast cancer in 2006 forcing her out of the workplace. Being unable to earn any income along with treating her cancer, Germaine was facing an uphill battle.

Luckily for Germaine she had an Income Protection policy that would cover up to 75% of her income. With the cover, Germaine was able to take time off and recover.

Eventually, Germaine was able to return to the workforce, part time. Her insurance policy allowed her to switch to a "partial benefit" to cover the days where she is no longer working.

“Your claim can be considered full or partial. Some policies allow you to switch to another based on your ability to claim”

Tips from Germaine

During the claim

  • Make sure your claim is backdated to the original date you are diagnosed.

Once you are on cover

  • 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.

Any other tips?

Cancer suffers 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 can I avoid paying too much for income protection?

One of the ways to maximise your policy and reduce the cost of your cover is to consider the following:

  • Choose your waiting period. The waiting period is the time that must elapse between you suffering your illness or injury and when your policy provides a monthly benefit. Insurers have a range of waiting periods for you to choose from, with the shorter period you choose resulting in higher premiums. If you think you can afford to survive a little longer on your own savings before you need to receive a benefit, select a longer waiting period to lower your premiums.
  • Choose your benefit period. The benefit period is the amount of time for which your policy will continue to pay benefits. If you choose a policy with a longer benefit period, this will obviously result in higher premiums. However, if you can afford to select a shorter benefit period, know that this will result in cheaper premiums.
  • Agreed or indemnity value policy. Income protection policies are offered in agreed value or indemnity value form. Under an agreed value policy, you must provide proof of income when you apply for cover, and the benefit amount you will receive is based on your income at that time. Indemnity value policies, however, require you to provide proof of income when you make a claim. If you have an agreed value policy but your income has risen substantially since you first took out cover, your policy may not be sufficient to meet your financial requirements.
  • Stepped or level premiums. Income protection policies are offered with stepped premiums. Stepped premiums will start out lower and increase over time. Level premiums will remain the same over the life of the policy.
  • Review your cover. As your life changes and you grow older, your income protection insurance needs to change as well. Review your policy regularly to make sure you have the right level of cover in place and that you aren’t paying for policy features you don’t need.
  • Quit smoking. Easier said than done but the fact is that premiums are lower for non-smokers.
  • Tax-deductible premiums. Another major drawcard of income protection insurance is that premiums are generally tax-deductible.

I need to make a claim, what benefit am I going to receive?

Income protection insurance is designed to act as a steady source of replacement income when you suffer an illness or injury and are unable to work. To do this, policies typically provide an ongoing monthly benefit that equates to 70% of your regular income. This benefit is paid until you are ready to return to work and start earning money again.

In order to make a claim, you’ll need to provide evidence of your illness or injury to your insurer. The exact evidence you will need to supply differs from one insurer to the next, so speak to your insurance provider for more information.

If you think you would struggle to cope financially if you were unable to work for an extended period, income protection insurance is something you ought to consider. However, it’s vital that you do your research on the available policies and shop around for one that offers competitive cover at an affordable price.

Compare income protection policies

More guides on Finder

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site