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 75-85% 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.

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Do I actually need income protection?

Can’t decide whether income protection insurance is worth it? Take a closer look at the benefits this type of life insurance offers and why it could be essential for you.

What Is Income prOTECTION?

Key benefits

  • Peace of mind. If you can’t work due to sickness or injury, income protection insurance provides a replacement income.
  • Financial security. With income protection cover in place, you don’t have to worry about falling behind on your mortgage repayments or being unable to pay the bills.
  • Essential cover. If you rely on your income to get by from one week to the next, income protection cover provides a crucial safety net. This is especially true for self-employed people and small business owners, or anyone else whose business relies on their ability to work in order to stay afloat.
  • Protection against the unexpected. We can’t predict the future and accidents and illness can strike at any time. Income protection insurance guarantees that you’re prepared for the future no matter what it holds, ensuring that you can keep providing for your family even when you’re unable to work.
  • Freedom. When you don’t have to worry about money and making ends meet, you’re free to focus on your recovery.

What can these benefits be used for?

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

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.

The three disabilities that covered by income protection

One of the key features you need to understand about any income protection policy is the insurer’s definition of disability. In order to qualify for an income protection benefit, the insurer will need to be satisfied that you are disabled and unable to work.

However, where things get tricky is that there is no one uniform definition of disability accepted 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.

Basic features of income protection you should understand before applying

There are several factors you need to consider when choosing an income protection policy:

  • The waiting period. This is the period of time you will need to wait from the time you become disabled before you will start receiving monthly benefits. Waiting periods usually range from 30 to 90 days, with shorter waiting periods resulting in higher premiums. Remember to take into account your emergency cash supplies and whether you have any paid leave days up your sleeve when choosing a waiting period.
  • The benefit period. This is the maximum time period for which the insurer will continue paying benefits, for example for two years or until you turn 65.
  • The benefit amount. Most insurers will pay a monthly benefit equal to 75-85% of your pre-disability income, up to a set limit. Check each policy to find out the maximum monthly benefit you will be eligible to receive.
  • The definition of disability. There are three different definitions of disability based on your ability to perform the duties of your usual occupation, your ability to work a certain number of hours per week, or your ability to earn your regular income. Check the fine print to find out which definition your insurer uses.
  • The premiums. Cost is always an important factor when choosing income protection insurance, so get quotes from multiple insurers to see how they compare. However, remember to consider the premium amount in line with the benefits and features each policy offers. Just because one policy is cheaper than all the others doesn’t necessarily mean it’s right for you.

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

  • 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.
  • 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 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.
  • 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.
  • 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 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.

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Apply online without an adviser with these direct brands

Product details Maximum cover Maximum Entry Age Cooling-off
Virgin Income Protection
Virgin 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 the first month free for Income Protection or two months free with combined cover. Offer ends 30 June 2017 $25,000 59 30 Get quoteMore info
TAL Lifetime Protection Income Protection
TAL Lifetime Protection Income Protection
Cover up to 75% of your monthly income (to a maximum of $10,000) with cover options for accidents, illnesses and sports injuries. $10,000 59 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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