Is Income Protection Insurance Worth It?

Not sure if you need income protection insurance? Find out why income protection can go a long way.

For many Australians, one of the  most important assets is our ability to earn an income. So when that ability is taken away by an illness or injury which keeps you out of the workforce for an extended period of time, it doesn’t take long for the financial pressure to start to build. Income protection insurance is designed to combat this problem.

What makes income protection a worthy investment?

Some of the key benefits that income protection can provide include:

  • Cover for the unexpected. Financial support when you suffer an illness or injury and are unable to work.
  • An ongoing monthly benefit.This can replace up to 75% of your regular income.
  • Tax benefits. The ability to make tax deductions with your premium payments
  • An optional rehabilitation benefit. This helps you financially with the cost of rehabbing

It offers peace of mind and financial security for many Australians. Read on to learn how you can benefit from this type of protection.

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Compare income protection quotes from these direct brands

Details Features
Income Protection
Income Protection
Cover up to 85% of your income up to $10,000 per month if you can't work due to sickness or injury. Cover for over 1,000 jobs and full-time, part-time and self-employed.
  • Monthly benefit up to $10,000
  • Cover for applicants up to age 60
  • 30 day cooling-off period
Go to site More info
Income Protection
Income Protection
Receive up to 75% of your income each month to a maximum of $25,000 if you can't work due to serious illness or injury.
  • Monthly benefit up to $25,000
  • Available for applicants up to 59 years old
  • 21 day cooling off period
Go to site More info

What are the main benefits of income protection?

The thought of being out of work and having no income can be daunting. Some people even believe that “nothing could possibly happen to me”. As a result, many push income protection to the back of their minds. However, income protection, also known as salary continuance, has many benefits as it provides financial support if you’re injured on or off the job, and peace of mind knowing your family will be provided for if you’re unable to work.

  • Income protection keeps up to 75% of your gross monthly salary coming in until you’re fit to return to work.

Isn't income protection the same as 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.

Cover for injuries and illnessesWorkCoverIncome Protection
Inside work
  • Yes
  • Yes
Outside of work
  • No
  • Yes
  • 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.

Who is workers compensation run by?

Employees should think twice before relying primarily on workers’ compensation for income protection. WorkCover is the name given to the insurance funds run by state governments to provide payouts for employees who aren’t able to work due to an on-site injury.

What types of benefits can workers compensation provide?

There are four types of benefits you can claim under workers’ compensation:

  • Income replacement
  • Permanent disability
  • Medical benefits
  • Death benefits

Consider combining income protection with WorkCover for comprehensive protection

Just because you are protected by WorkCover doesn’t mean you couldn’t also benefit from an income protection insurance policy, so consider your cover options carefully before deciding on the right approach.

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 timeframe is limited. Income protection insurance 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 covers 75% 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.

How much is income protection going to cost me?

How much your income protection premium will cost each month depends on the policy and your individual or family circumstances. The policy covers a wide range of illnesses and has the potential to provide benefits for many years. The cost comes down to a number of factors including:

  • Your age. As you get older your premiums will rise as it’s more likely you’ll become sick, or sustain an injury in some way.
  • Gender. Insurance providers argue women are more prone to taking time off work than men, due to pregnancy and complications. An early retirement statistic also sees females paying higher premiums.

Here are a couple of examples showing fees you might pay for a standard policy, with under AUD$4,000 cover a month and a 30-day waiting period:

  • A male doctor could fork out around AUD$450 in an annual premium, while a female doctor would pay AUD$630.
  • A female teacher will pay around AUD$200 more than her male counterparts.
  • Working in underground mining would see a male pay around AUD$1,200 for his annual premium, while a woman will pay around AUD$1,700.
  • Occupation. The more dangerous the job, the more likely an accident will happen. This pushes premiums up.
  • Lifestyle choice. Things such as smoking, which can increase the risk of causing serious illness or injury. Smokers can pay as much as double the normal premium under industry standards.
  • Medical history and pre-existing conditions. If you have a pre-existing medical condition you’re going to pay a higher premium. This is due to the instant and ongoing financial risk to the insurer. Those in good health will pay standard premiums.

Insurance providers will differ when determining the cost of your insurance premiums. The best advice is to shop around to find the best policy for you.

How can I avoid paying too much for income protection?

One of the ways to to maximise your policy and reduce the cost of your cover is to follow these

  • 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 lengthy 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 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 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.

What is the difference between agreed and indemnity value?

As mentioned earlier, you’ll need to decide between an agreed value income protection policy and an indemnity value income protection policy.

  • Indemnity value insurance. The most common and usually cheapest policy. Your benefit is adjusted according to changes in your income, at the time you make a claim. This means your benefit could drop if you’re making less money at the time of a claim. You don’t need to show proof of your income until a claim is made.
  • Agreed value insurance. The most expensive form of cover, but benefits are fixed on your income at the time you begin the policy. Future changes to your income are not taken into account. This means you will know what your benefit will be before you make a claim.

However, those with fluctuating incomes, for example small business owners and the self-employed, are typically better off with the security offered by an agreed value policy.

Take advantage of your premium options for affordability in the long term

If you understand how premiums work, you can find a policy where you pay less in the long term. The main types of premiums are:

  • Stepped. This is a premium that rises each year. Stepped premiums typically start off lower and end up higher later on.
  • Levelled. This is a premium that stays the same throughout the life of the policy. Levelled premiums tend to start higher than a stepped premium equivalent but end up costing less than a stepped premium later on.
  • Hybrid. This is a combination of both stepped and levelled premiums. Hybrids typically start off as a stepped premium then convert to a levelled premium later on.

Can I claim tax-deductions on my premium?

Income protection expenses are tax deductible, but only relating to premiums paid for your policy. Benefits paid into your account are tax assessable. To claim back on tax, you need to lodge every payment regarding your premiums, and any benefits paid by your fund while you were off work.

Is it deductible through super?

If you’ve taken out income protection insurance through your superannuation fund, you can’t claim this back for tax purposes.

Can I get cover through my super?

You may wish to consider applying for income protection insurance through superannuation. Rather than reaching into your own pocket and interrupting your day-to-day cash flow to buy cover, income protection through super is funded by your superannuation balance or by your employer contributions. This can make it easier and more affordable for some people to take out some form of protection.

Is it cheaper?

Policies through super are often bought in bulk by the super fund which means you can access a cheaper rate on a standardised policy.

Drawbacks to be aware of

Some of the main drawbacks of an income protection policy through super include:

  • It is more difficult to make a claim through your super fund. This is because it's up to the fund’s trustee to determine whether you satisfy the temporary incapacity condition for release of funds before you will receive any benefit.
  • Basic level of cover. Policies held through super will typically not provide the same level of tailored cover as policies purchased outside super. This is due to the fact that they are group policies that cannot be designed to meet your specific needs.
  • No tax benefits. You are not able to receive any tax deduction benefits for income protection that's held inside a super fund.

What is home duties income protection? Do I need it?

Income protection insurance is also available for people who are homemakers. Although homemakers don’t draw an income that will need to be replaced, their temporary incapacity to perform their normal duties can place a significant financial strain on any household. There could be childcare costs to contend with, expensive transport arrangements, and cooking and cleaning services, all of which could come at a sizeable cost. With this in mind, an increasing number of Australian insurers are making income protection cover available to homemakers. These policies provide a monthly benefit to help ensure the smooth running of your household, covering the cost of cooking, cleaning, childcare and more. If you’re a homemaker and your household would grind to a halt if you were injured or ill for an extended period, this type of cover may be worth considering.

John Bender Didn't Forget About Income Protection

John Bender and his wife Claire are in their 30s. They live in Sydney’s northwest with their two primary school aged children, and they still have $350,000 left on their mortgage. John earns $75,000 per year as a construction manager, while Claire’s work as a part-time librarian brings in $30,000 each year. However, when John is involved in a serious car accident and suffers fractured vertebrae, doctors estimate he will be looking at a long recovery that could take up to a year. If John did not have any income protection in place, the cost of meeting mortgage repayments and paying the day-to-day expenses of raising a young family would be simply too much to bear on Claire’s salary. However, John had the forethought to take out an income protection policy which offers a monthly benefit of around $4,700. This enables John and Claire to continue making mortgage repayments and continue to afford all their ongoing expenses. Free from the stress of having to worry about their financial situation, John enjoys a complete recovery and returns to work after 11 months.

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 75% 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 should definitely 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.

Speak with an adviser about getting income protection

William Eve

Will is a personal finance writer for specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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