What is Short Term Income Protection Insurance?

Looking to protect your income for a shorter period while keeping within your budget? Find out how short term income cover works

Short-term income protection is, as its name suggests, income protection insurance that provides a short-term benefit if you are unable to work due to accident, illness or unemployment. It simply has a reduced benefit period in place. The benefit period is the duration of time for which the policyholder is eligible to receive an ongoing payment while they are unable to work. Most providers offer benefit periods of:

  • 2 years
  • 5 years
  • To retirement or age 70

STIP is designed to provide an affordable safety net or stop-gap solution for people who don’t have sufficient financial resources to be able to ride out a brief period of illness or injury. It’s particularly useful for those with essential outgoings that must be maintained at all costs, such as rent, mortgages and loans.

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Can I get cover for a short period if I am made redundant?

There are a number of general insurance companies that provide cover for short periods in the event you become unemployed involuntarily. As an example, the Virgin Money Involuntary Unemployment Benefit provides up to $3,000 per month for up to three months if you are made redundant. This feature can provide valuable financial support for a short period to cover immediate expenses while you look for work. However, it’s worth noting some of the conditions that must be met for a benefit to be paid:

  • Must be employed for 6 months prior to becoming unemployed
  • Unemployment must not be due to your performance

Whats the benefit of short term income protection?

With a short term income protection insurance, you get to call the shots on:

  • The waiting period. How long you must be off work before you can claim your benefit (typically 14, 30 or 90 days)
  • The claim period. How long you’d like the policy to continue to pay you (typically for a maximum period of two years).

Most short term income protection insurance policies may also offer handy optional benefits that you can add to your policy, such as:

What’s more, unlike other forms of personal risk insurance, short term income protection insurance policy premiums are tax deductible for most taxpayers. This easily makes a short term income protection insurance policy one of the best low-cost, high-value insurance covers out there and a definite top choice to protect yourself and your loved ones from any unexpected financial hardship that you may come across one day.

How do income protection benefit periods actually work?

The benefit period is the amount of time that you receive a monthly payment from your IP insurance (usually up to 75% of your normal income). Most insurers offer benefit periods of:

  • 2 years
  • 5 years
  • To a specific age, such as 60 or 65 years

You will need to decide at the time of applying for your policy which benefit period you want and, more importantly, can afford to have. The shorter the benefit period, the cheaper your premiums will be.

How long does income protection through superannuation last for?

Income protection is available for up to two years for cover that is funded through superannuation. Cover can remain in place until age 70, similar to cover held outside of superannuation.

How long will I have to wait before I am actually paid?

The period of time you must wait before your benefit payments begin is known as the waiting period. In the case of illness, the waiting period starts when you are first diagnosed. In the case of an accident, the waiting period starts from the day the accident occurred. In the case of unemployment, the waiting period starts from the day you were made redundant.

Common waiting period options for short-term income protection insurance include 14, 30 or 90 days.

Unlike benefit periods, where the longer the benefit period the more expensive the premium, the longer the waiting period you choose, the cheaper your policy will be.

A key consideration when selecting a waiting period is the financial resources you have at your disposal. If you have a lot of accumulated sick pay, annual leave or personal savings, you may be able to choose a longer waiting period, as you will have those funds to support you until you receive your benefit. By contrast, if you are self-employed and don’t get sick pay or holiday pay, a shorter waiting period might be a necessity.
Want to know more? Read our guide to income protection waiting periods

Tips For Comparing Short Term Income Protection Policies

With so many short term income protection insurance providers out there, it can seem overwhelming trying to search for a policy that will best suit you and your family’s needs. Here are some key points to keep in mind when comparing your short term income protection policies:

Agreed value or indemnity value?

While an agreed value policy will pay you a pre-arranged fixed sum for your benefit regardless of what your actual income is at the time of the claim, indemnity value policies will check and match your income at the time of a claim. The latter option is often offered through superannuation funds. This could play a significant factor if, for example, a full-time worker had suffered an illness but continued to work part-time with reduced hours, before reaching a stage where they could no longer work and wanted to submit a claim.

Level premiums or stepped premiums?

Whilst probably not a big defining factor for short term income protection policies of a few months, if you intend on having a longer claim period it is worth reviewing the cost differences between level and stepped premiums.

Indexation of benefits?

If you’re looking to purchase a short term income protection policy that extends beyond a year or two, it’s a good idea to see if your short term income protection policy offers built in benefits indexation. Built in indexation would see your benefits increasing in line with inflation, helping to maintain its original value.

Are there any exclusions?

As with any insurance policy, exclusions are a crucial element to be aware of prior to purchase. Be sure to ask about any circumstances where the policy may not payout. For example, would your chosen short term income protection insurance take care of you if you were retrenched?

Are there any exclusions?

As with any insurance policy, exclusions are a crucial element to be aware of prior to purchase. Be sure to ask about any circumstances where the policy may not payout. For example, would your chosen short term income protection insurance take care of you if you were retrenched?

Who might a short-term policy suit?

Whilst short term income protection insurance is suitable for virtually anyone who relies on their ability to earn a living, it is particularly fitting for those whose businesses, dependents and incomes rely heavily on their ability to work, such as:

Short term income protection is also suited to:

  • Those with mortgages, loans, car payments and other debts that must be constantly serviced
  • Those close to retirement who have been forced to eat into their nest egg to pay bills or who must wait to receive their super or pension entitlements
  • Those who work in industries where redundancy is a possibility (although you must not be aware of an imminent redundancy at the time of applying)
  • Those who don’t have a contingency fund to fall back on in the event of an emergency (a minimum of 6 months’ worth of income, according to experts)

How else can I save on income protection insurance?

While short term income protection insurance is more affordable than general IP cover, you can reduce the cost of your premiums even further by observing a few simple rules:

  • Choose the longest waiting period and the shortest benefit period you can realistically afford to have
  • Choose an indemnity value policy, which is around 20% cheaper than an agreed value policy (indemnity value is best suited to those who receive a regular income that is not likely to be reduced prior to making a claim)
  • Choose stepped premiums, which are cheaper than level premiums, if you only plan to have STIP cover for a few years
  • Find a policy that lets you tailor your benefits to include only those relevant to your individual situation
  • Forgo CPI increases that raise your benefit amount and premium cost annually in line with the CPI. This would mean cheaper premiums but a reduced benefit amount due to inflation.
  • Bundle your cover with your other insurance policies to qualify for a discount
  • Improve your overall health and give up smoking (smokers pay twice as much as non-smokers)
  • Pay before June 30 to claim your tax deduction in the current year on your IP premium
  • Shop around for the best deal (not just the cheapest, but the best value for money)

Make an enquiry for short term income protection cover

William Eve

Will is a personal finance writer for finder.com.au 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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