What is Income Protection Insurance?

Here's everything you need to know about income protection. Protect your family's financial future with the right cover.

How would you support your family if you get sick or hurt and can't work? That's what income protection is for. This type of insurance pays a monthly benefit to replace your salary when accident or illness keeps you off the job.

An income protection policy:

  • Pays an ongoing monthly benefit of up to 75% of your pre-tax income until you return to work.
  • Lets you cover your debts and expenses while you're out of work.
  • Provides peace of mind and financial protection for you and your family.

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How can I benefit from an income protection policy?

Income protection has plenty of benefits and can cover you financially in ways that many other types of insurance can't. It might not be for everyone, but everyone should at least consider it. Here's what an income protection policy can do for you.

Income protection benefits

Income protection: key benefits and features

  • Peace of mind. You don't have to worry about your finances if an injury or sickness keeps you out of work.
  • Financial security. Keep on top of mortgage repayments, rent and bills.
  • Freedom. When you don’t have to worry about money and making ends meet, you’re free to focus on your recovery.
  • Protection against the unexpected. Accidents and illness can strike at any time. Income protection insurance guarantees that you’re prepared for the future no matter what it holds.
  • Safety net. Income protection cover provides a crucial safety net, especially for self-employed people and small business owners.

What can these benefits be used for?

You can use the benefit payments from income protection insurance to pay for anything, just like your regular income.

  • 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

How does income protection compare to workers' compensation?

Workers Compensation Insurance only provides cover for illness or injury sustained at the workplace. 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.

Income protection covers injuries or illness whether they're work related or not.

Does income protection insurance cover redundancy?

No. Redundancy insurance is a different policy type. It also pays a similar monthly benefit like income protection, but it pays out if you lose your job. While it may be possible to get limited redundancy cover in an income protection insurance policy not many insurers provide have this option.

How can this page help?

How do benefit payments work?

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 is usually 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.

To understand income protection payments you need to know about the following:

Policy featureDetails
Premiums
  • This is the amount you pay for your policy per month.
  • Premiums are calculated based on your age, income and occupation, among other things.
Waiting period
  • You will not receive benefit payments immediately. The waiting period is the number of days you have to wait before payments begin.
  • Waiting periods are typically between 30 and 90 days.
Benefit period
  • The benefit period defines the maximum length of time you'll receive payments.
  • Benefit periods are typically two or five years.
  • You can also choose to receive payments up until a certain age (usually 65).

A shorter benefit period means higher premiums, while a shorter benefit period leads to lower premiums.

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.

What policy features and benefits should I look for when comparing policies?

Given how competitive the insurance market is, most insurers offer many options, features and extras. Some of these are standard, some cost extra and others might be specific to an insurer. While everyone has different cover needs, here are some common features and benefits to look for:

  • Guaranteed future insurability. This option allows you to renew your policy without taking more health tests. If you're older or concerned about illness this can be a valuable option. Read more about guaranteed future insurability here.
  • Additional recovery benefits. Look for policies that pay additional benefits, such as rehabilitation benefits, to cover your recovery expenses.
  • Benefit indexation. With this option your benefits will be adjusted for inflation each year, ensuring they don't become less valuable over time.
  • Non-cancellable policies. Your insurer cannot cancel your policy even if your health circumstances change.
  • Premium freeze. This feature lets you freeze (stop paying) your premiums for a specified period of time.

When shopping for a policy you often have to choose between one of two options. Often these options can result in very different policies so check carefully.

Policy optionsDetails
Own Occupation or Any Occupation
  • Own Occupation policies are usually more expensive and pay a benefit if you are unable to work in your chosen field
  • Any Occupation policies only pay a benefit if your disability limits you from working in any job. For example, a serious leg injury means a security guard can't work as a security guard
Stepped or Level premiums
  • A stepped premium is cheaper initially but gets more expensive over time
  • A level premium costs more but stays the same
Agreed value orIndemnity value
  • Agreed value cover is more expensive and lets you set your own benefit amount.
  • It's a great option for people with fluctuating income who don't receive a stable salary, such as sold traders or freelancers.
  • Indemnity value is cheaper and sets your benefit amounts based on your income at the time of a claim.
  • If you're on a stable monthly salary this is probably fine.

The differences between these options can be confusing. You can learn more about the differences between own and any occupation here. This guide explains stepped and level premiums in more detail.

Always check a policy's product disclosure statement (PDS) carefully before buying any insurance policy. The PDS is the fine print that explains the entire policy in detail.

Smiling mother, father and baby

How do insurers define accident and injury?

In order to qualify for an income protection benefit, your insurer needs to be satisfied that you are disabled and unable to work.

But there is no one uniform definition of disability across all Australian income protection policies. Instead, there are three different definitions that insurers use to assess degrees of disability:

  • Duties-based disability. This is the most commonly used definition of disability. If it applies to your income protection policy, you will qualify for the full benefit amount if your injury or illness prevents you from performing the income-producing duties of your occupation. If you are able to perform some but not all of the income-producing duties associated with your occupation, you may be eligible for a partial benefit.
  • Hours-based disability. Under an hours-based definition, you will qualify for a full income protection benefit if you are unable to work in your own occupation for at least 10 hours per week. If your working hours are reduced by illness or injury but you are still able to perform more than 10 hours a week in your usual occupation, your policy may pay out a reduced benefit.
  • Income-based disability. If an income-based disability definition applies to your policy, your insurer will classify you as disabled if illness or injury has led to a reduction in your income by 20% or more. However, if you are still able to work and earn some income, you will receive a reduced benefit amount.

Before you apply for a policy, make sure you’re aware of how the insurer defines disability and what conditions you will need to meet to qualify for monthly income protection benefits.

A Costly Game of OzTag

Smiling plumberJames is a self-employed plumber who dislocated his knee during a rough game of OzTag. After going to hospital, James was devastated to learn the surgery and recovery time required six weeks off work. Even after that he would need several more weeks confined to crutches.

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 dire financial stress. Luckily, James's wife Tulia had persuaded him to take out income protection insurance two years earlier.

The policy - agreed value cover with a duties-based disability definition

James took out an income protection policy with a duties-based disability definition and agreed value cover. He was able to receive his full income while out of work. As he recovered and began taking on some light work James was able to continue receiving a partial benefit payment.

Because the policy had agreed value cover James's benefit payment was a set monthly amount comparable to an average month's income for James. This was fortunate because at the time of the injury James was going through a quiet patch and not making as much money. If he had taken out a cheaper indemnity value cover policy he would have received a much smaller benefit.

How much do income protection premiums typically cost?

Insurers use many factors to calculate your premium costs. These factors include:

  • Age
  • Gender
  • Income
  • Occupation
  • Lifestyle
  • Level of cover
  • Type of premium
  • The benefit and waiting periods

To give you a rough idea of insurance premium costs here are some examples of policy quotes taken from finder's comparison engine. Note that these samples are taken from the cheaper policies available and are not a comprehensive estimate:


*These are example quotes only for a range of ages and occupations. All quotes are based on a non-smoking NSW resident and are accurate for June 2017. Your actual quotes will vary.


What else should I know about income protection?

  • 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.
  • 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.

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

BenefitHow it works
Trauma event benefitA lump-sum benefit for trauma conditions that are specified in your policy
Death benefitA lump-sum benefit in the event you pass away
Needle-stick injury benefitThis 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 benefitA 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 benefitWill reimburse the costs of an immediate family member's accommodation costs that travels over a specified distance to stay with you
Family care benefitWill 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 benefitThis provides cover for fixed business expenses while you are disabled, enabling your business to keep afloat

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

Some other questions you might have

  • Cover is generally available for Australian residents aged between 18 and 63 (age next birthday). The maximum age on some policies is 59.
  • 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.
  • 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.
  • 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. Learn more about income protection for high-risk manual jobs here.
  • While most policies by default will provide you with a default level of cover of 75-85% 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.
  • 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.
  • No. You are required to apply for cover individually. If your partner is stay-at-home, you may be able to apply for cover and include what's known as a homemaker option. The insurer will also need to verify their details in order for cover to be put in place.
  • 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.

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

  • Yes, you can cancel your policy at any time you choose.
  • No. There is no surrender value if you cancel your policy outside of the cooling-off period.

Interested in applying for income protection?

If you are looking for a new income protection policy or want to review your current policy to see if there's 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 and provide you with a quote.

Quotes are provided free of charge and there is absolutely no obligation to sign up for a policy.

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Apply online without an adviser with these direct brands

Rates last updated October 21st, 2017
Name Product Short Description Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period
Cover up to 75% (to a maximum of $25,000) of your monthly income with NobleOak Income Protection. Benefit period can be tailored to suit your needs.
$25,000
75%
2 years or to the age of 65
30 or 90 days
Protect your lifestyle with Virgin Income Protection. New eligible customers can earn 25,000 Velocity Points. Ends 31 Oct. Min monthly premium and T&Cs apply.
$10,000
85%
5 years
14, 28, 60, or 90 days
Cover up to 75% of your monthly income if you can’t work due to illness or injury, up to a maximum of $10,000 a month. Take out cover today and you could get a bonus $100 Gift Card.
$10,000
75%
5 years
30 or 90 days

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Picture: Shutterstock

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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