What is Income Protection Insurance?

Think you might need Income Protection but want to know more?

Income protection insurance is designed to offer a replacement income to allow you to continue to provide for your family when you are sick or injured and unable to work.

Like all other forms of life insurance, income protection cover is all about providing peace of mind. If you suffer an illness or injury and are unable to earn your regular income, an income protection policy will pay an ongoing monthly benefit usually up to 75 per cent of your pre-claimed income until you are able to return to work. The benefit payments you receive can be used just as your normal income would. You can use the funds to keep paying off your mortgage or credit card, buy groceries and petrol, and look after all of your usual day-to-day expenses. It helps you stop worrying about your finances while you’re off work and allows you to focus your energy on getting better.

Compare quotes for income protection from Australian insurers

Do I actually need it?

To determine if you would benefit from an income protection policy, ask yourself: how would I manage if I couldn’t rely on my income for a few months? With a mortgage or credit card to pay off, a partner to support and kids to feed, clothe and send to school, would you be able to survive without the security and convenience of a pay cheque every fortnight?

You may think you’d be able to get by if you start putting aside some money into an emergency fund today, but you might be surprised how quickly that money will start to dwindle when it’s all you have to rely on. If you (and your family) rely on your income, you could certainly benefit from having income protection cover in place — especially if you’re a small business owner, self-employed, or if the success of your business is heavily influenced by your ability to work.

You might decide that you need cover in place permanently, or you may decide that you may only need the protection for a limited period of time — for example, until your kids leave home or until you’ve paid off your mortgage.

You can use the benefits from income protection insurance just like you would use your regular income, including to:

  • Maintain your standard of living
  • Pay off your mortgage
  • Pay off your credit card and other debts
  • Buy groceries and other everyday items
  • Pay your kids’ school fees
  • Help cover the cost of your recovery

Looking for a quick summary of the key benefits of income protection?

What Is Income prOTECTION?

But aren’t I already covered by workers compensation insurance?

Workers Compensation Insurance only provides cover for illness/injury sustained at the workplace and benefit payments are usually capped at 32 weeks. What's more, you will also be required to prove negligence on the part of your employer in order for a benefit to be paid.

How much can I get paid?

Unlike other forms of life insurance, which offer a lump sum payment for successful claims, income protection cover provides an ongoing monthly benefit that is similar to a regular income. The monthly benefit you receive will usually pay an amount that is up to 75 or 80 per cent of your income before you were injured or became ill, although you can choose a smaller benefit amount if you wish. Your regular income is usually defined as your gross salary plus superannuation, but definitions can vary between insurers.

In order to determine how much cover you need, you’ll have to consider your current financial situation and future plans, as well as all the ongoing expenses you will need to meet.

How long will I be paid for?

The amount of time your policy will continue paying benefits is called the benefit period. You can choose your benefit period when you apply for cover and the available choices can differ between insurers. Some might offer a selection of benefit periods such as one, two or five years, while others might offer to pay benefits until you reach a certain age, for example 65 or 70 years.

Because a shorter benefit period means your insurer will have to pay you a smaller amount when you make a claim, you will pay cheaper premiums as a result. The longer the benefit period, the higher your premiums will be.

When will I be actually be paid?

If you fall ill or are injured and are unable to work, you will need to wait a certain amount of time before your policy will start paying a benefit — this is known as the waiting period. You can choose the waiting period that applies to your policy when you take out cover, with insurers typically offering a choice of waiting periods that can range anywhere from 14 days to two years. The longer your waiting period, the cheaper your premiums will be.

It’s also important to point out exactly when a waiting period starts. If you’re involved in an accident, the waiting period usually begins on the day your injury occurs, while policyholders who fall ill will begin their waiting period on the day their sickness is diagnosed.

Exactly which waiting period is right for you will be determined by how long you think you could manage financially without your regular stream of income. Of course, shorter waiting periods make it easier for you to satisfy the necessary requirements for a claim.

Case Study: A Pricy Game of OzTag

Knee injury

Plumber James was playing his weekly game of OzTag with his workmates when he dislocated his knee after falling awkwardly over another teammate. Immediately knowing something was seriously wrong, James was rushed to hospital where he was informed his femur and tibia had been forced out of alignment and would require surgery.

James was devastated to learn the surgery and recovery would mean he be forced to take at least six weeks off work to let his knee recovery and then would only be able to work at a reduced capacity while he was confined to a brace. As a self-employed plumber with a mortgage, three kids to feed and no compensation or sick leave to fall back on, James was facing certain financial stress. Luckily, James wife Tulia had persuaded him 2 years prior to take out income protection insurance with an agreed value benefit structure. James was able to lodge a successful claim and receive monthly payments of his agreed income for the time he had off. An additional benefit was even paid to cover the costs of a rehabilitation program James entered to speed up his recovery.

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What else should I know?

  • Your premiums are tax deductible. Income protection insurance premiums are generally 100% tax deductible. This may change if your cover is funded through your superannuation, so it could be worth getting in touch with a certified tax specialist to help you with any tax-related questions you may have.
  • Some insurers offer day-one accident cover. There are some policies that provide cover straight away if you are injured in an accident and unable to work – no need to serve a waiting period.
  • You are covered 24/7. Income protection insurance covers you 24 hours a day, seven days a week no matter where you are in the world.
  • It’s different to workers’ compensation cover. Workers’ compensation insurance only provides cover for accidents and injuries that occur at work; income protection insurance also covers you for non-work-related illnesses and injuries.
  • You can take out cover through your superannuation. Income protection cover through your superannuation fund is generally cheaper than a standalone policy but will not offer the same level of cover.
  • Make sure your policy offers benefit indexation. Look for a policy that will increase your level of cover each year in line with the Consumer Price Index.
  • You can choose between Own Occupation and Any Occupation Income Protection: 
  • Own Occupation Income Protection. Is more expensive and will pay a benefit if you are unable to return to work in your own occupation that you have trained for.
  • Any Occupation Income Protection. Will only pay a benefit if you are unable to return to work in any occupation at all. As an example, if you are a dive instructor you may not be able to return to your own occupation following a serious injury but would still be able to gain employment in an office job. You would only be paid under an own occupation definition.
  • Look for a non-cancellable policy. This means the insurer cannot cancel your cover if your health circumstances change.
  • You can choose between Indemnity and Agreed Value Cover:
  • Agreed Value. Will pay a benefit based on your income at the time of application. In the event of a claim you will be paid a benefit based on what your income was verified as when you applied. This option can be more suitable for workers with fluctuating incomes that may struggle to show how much they earned previously.
  • Indemnity Value. Will pay a benefit based on your gross income when at the time of a claim. You will need to verify your income if you are ready to make a claim for cover. This option is generally more suitable if you have a steady income and can foresee an increase in salary over the course of your career.
  • Additional benefits for recovery. Some policies will pay additional benefits to help you get back on your feet quicker.

How much is it going to cost?

There are several factors that influence the cost of your income protection premiums, including:

  • The waiting period you choose. Shorter waiting periods mean more expensive premiums.
  • The benefit period you choose. The longer your benefit period, the more you will have to pay for cover.
  • The level of cover you choose. Some insurers will offer two or more levels of cover to suit varying needs and budgets
  • Your occupation. Working in a hazardous occupation will increase your premiums relative to someone who works in a low-risk office job.
  • Whether you smoke. Because of the many health problems smoking causes, smokers pay higher income protection premiums than non-smokers.
  • Your age. The older you are, the more you will have to pay for your premiums.
  • How much you earn. You’ll obviously be insured for a higher amount if you earn a higher income, so expect this to be reflected with increased premiums.
  • Your gender. Women tend to pay more for cover than men.
  • Your recreational pursuits. Do you love participating in adventure activities like hang gliding every weekend? Expect the increased risk of injury that comes with these sorts of sports to translate into higher premiums.
  • How you choose to pay your premium. Whether you choose stepped or level premiums will also impact the cost of cover. Stepped premiums will start off lower but will increase overtime whereas level will start off higher but remain the same for the life of the policy.
  • Your premium frequency. Paying your premium annually as oppose to monthly or weekly will usually result in a reduction in the price you pay.
  • Sick leave you can fall back on. If you have enough sick leave accumulated to last you for three months, you may be able to opt for a longer waiting period on your policy.

What else can my policy cover me for?

Income protection policies offer both built-in and additional benefits to give you optimal protection in the event of serious illness or injury. This includes:

  • Trauma event benefit. This will pay a lump-sum benefit for trauma conditions that are specified in your policy.
  • Death benefit. This will pay a lump-sum benefit in the event you pass away.
  • Premium freeze. This feature lets you freeze (stop paying) your premiums for a specified period of time.
  • Benefit indexation. Your sum-insured will increase each year so to keep up with the rate of inflation.
  • Rehabilitation expenses benefit. Will pay you an additional benefit to cover the costs of an approved rehabilitation program to assist with your recovery.
  • Needle-stick injury benefit. This will pay a benefit if through the course of your occupation you become infected with HIV, AIDS, Hepatitis B or Hepatitis C as a result of a needlestick injury or splash injury.
  • Bed confinement benefit. A portion of your monthly benefit is paid for each day that you are confined to bed and require the full-time care of a registered nurse.
  • Accommodation benefit. Will reimburse the costs of an immediate family member's accommodation costs that travels over a specified distance to stay with you.
  • Family care benefit. Will pay a benefit if a member of your family is forced to take time off of work to care for you and suffers a reduction in their income as a result.
  • Business expenses benefit. This will provide cover for fixed business expenses while you are disabled so your business can remain afloat.

These are just some of the benefits you may be able to receive under different policies. Each policy will have details of exactly whats covered in the PDS.

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Some other questions you might have

Q. Who can apply for cover?

  • Cover is generally available for Australian residents aged between 18 and 63 (age next birthday). The maximum age on some policies is 59.

Q. Can I get cover if I only work part-time?

  • Generally, you will need to be employed to work at least 20 hours per week and to have been in the same job for at least 12 months. The benefit is based on your pre-tax income after other associated expenses have been taken into account.

Q. Can I get cover if I am self-employed?

  • Yes, provided you work for at least 20 hours per week and have been self-employed for at least 12 months. You will need to provide some form of evidence to the insurers surrounding your earnings.

Q. Can I get cover if I have a high-risk job?

  • It will depend on the nature of your occupation and the insurer that you choose. Insurers have different eligibility requirements for workers. It may be worth receiving help from an insurance consultant who can use their knowledge of the market to help you find a suitable option.

Q. How much cover do I actually need?

  • While most policies by default will provide you with a default level of cover of 75% of your income, you may be able to find cover with a reduced benefit amount. Consider what you would need to cover in the event that you were unable to work. It’s also worth noting that some insurers will only provide a maximum monthly benefit (such as $12,000 per month), so it’s worth checking to see exactly what you are eligible for.

Q. Can I increase or decrease the level of cover I am eligible for?

  • Yes, you can choose to adjust your policy (depending on the policy/insurer you have chosen) or increase/decrease your premiums as you see fit.

Q. Can I take out cover on behalf of my partner?

  • No. You are required to apply for cover individually. If your partner is a homemaker, you may be able to apply for cover and include the homemaker option. The insurer will also need to verify their details in order for cover to be put in place.

Q. Are my premiums tax deductible?

  • Premium payments generally are tax deductible if the benefit payment can be assessed as being for income tax purposes. Cover taken out through superannuation may not be tax-deductible.
  • Tax and income protection can be a complicated area to navigate so it could be worth speaking to an adviser about how you will be taxed.

Q. Do I even need it if I already have life insurance?

  • Life and income cover provide protection both offer protection for different reasons and both are worth considering having in place. Life cover provides a lump sum benefit in the event you pass away or suffer a terminal illness. Income protection provides an ongoing monthly benefit while you are unable to work for an extended period.

Q. Do I still have to pay for cover if I am receiving the benefit?

  • No, you don’t have to pay for cover if you are under claim

Q. Can I cancel my policy?

  • Yes, you can cancel your policy at any time you choose.

Q. If I cancel my cover, will I receive any payment?

  • No. There is no surrender value if you cancel your policy outside of the waiting period.

Interested in applying for income protection?

If you are looking for a new income protection policy or to just review your current policy to see if theres a more suitable option out there, you can make a no obligation enquiry with a certified insurance consultant. A consultant can help you compare the different options available to find something suitable and provide you with a quote for cover. Quotes are provided free of charge and there is absolutely no obligation to sign up for a policy.

Compare income protection quotes from up to 12 Australian brands

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Apply online without an adviser with these direct brands

Product details Maximum cover Maximum Entry Age Cooling-off
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. $10,000 60 30 Get quoteMore info
NobleOak Income Protection
NobleOak Income Protection
Receive up to 75% of your income each month to a maximum of $20,000 if you can't work due to serious illness or injury. $25,000 59 30 Get quoteMore info
Income Protection
Income Protection
Receive up to 75% of you income (up to $10,000 per month) of your income if you're unable to work due to serious illness or injury. $10,000 59 21 Get quoteMore info
Ezicover Income Protection
Ezicover Income Protection
Cover up to $12,000 income replacement when unable to work in any occupation due to sickness or injury. First month of cover is free. $12,000 60 30 Get quoteMore info

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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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