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.

Income protection is as simple as it sounds – it's insurance for your income. Can't go to work because of sickness or injury? That's what income protection is for and it will pay you a monthly benefit to replace your salary.

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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Compare income protection insurance from these Australian brands

Name Product Short Description Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period
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 1,000 job types - full-time, part-time and self-employed.

5 years
14, 28, 60, or 90 days
Receive up to 30% off in your premiums if you’re in good health and meet BMI qualification tests. T’s and C’s apply.
24 months
14 or 28 days
Take out a policy and get a $100 bonus gift after holding cover for 2 months. T's and C's apply. Offer ends 31 March 2019.
5 years
14, 28, 60 or 90 days
Get income protection cover (up to 75% of your income) without a medical test. Plus, Medibank health insurance members can save 10% off premiums.
5 years
30 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.
5 years
30 or 90 days
Cover up to 75% (to a maximum of $30,000) of your monthly income with NobleOak Income Protection.
2 years or to the age of 65
30 or 90 days
Cover up to 75% (to a maximum of $10,000) of your monthly income with Guardian Income Protection.
5 years
30 or 90 days
Join Qantas Income Protection and earn up to 100,000 Qantas points. T&CS apply including minimum premium and policy hold periods apply to earn points.
5 years
2, 4, 13 weeks or 2 years
Receive up to 75% of your income (up to $10,000 per month) if you're unable to work due to serious illness or injury.
5 years
30 or 90 days

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How can you 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. 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.

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.

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

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

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

  • 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 lot’s of questions about how your cover works to see how you can customise it.

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 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 feature Details
  • 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 options Details
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:

Benefit How it works
Trauma event benefit A lump-sum benefit for trauma conditions that are specified in your policy
Death benefit A lump-sum benefit in the event you pass away
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 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

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.

Compare quotes for income protection with an adviser

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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