Key Takeaways
- Income protection insurance makes regular payments if you can’t work due to illness or injury, usually covering up to 70% of your income for a set period of time.
- You can take out a standalone policy or claim income protection through your superannuation.
- Depending on your occupation, income, waiting periods, benefit periods and whether you want to fund it through superannuation, there are lots of options at your disposal.
Most Australians insure their cars, homes, health and even their pets, but what they tend to overlook is arguably their most valuable asset: their ability to earn an income. If you were to get sick or be seriously injured tomorrow and couldn’t work, how would you pay the bills? That’s where income protection insurance comes in.
If you’re thinking about taking out a policy or are unsure about what it entails, this guide will break down how income protection insurance in Australia works, what it covers, whether it’s worth it and how it differs depending on if you buy a policy directly or through your super fund.
What is income protection insurance?
It’s a type of insurance that gives you regular monthly payments if you’re unable to work due to a temporary illness or injury. Think of it as a way to replace a portion of your income – typically up to 70% of your gross income – so you can continue to cover your financial obligations while you get better.
The payments are ongoing for a set benefit period, which can range anywhere from two years up to the age of 65, depending on the policy you choose. Just like with most insurance types, a waiting period (e.g. 14, 30, 60 or 90 days) applies before payments commence.
What does income protection cover?
While there are lots of different policies out there, in most cases you’ll find that income protection insurance covers:
- A percentage of your regular income (up to 70%) if you’re temporarily unable to work due to illness or injury.
- Rehabilitation costs to help you return to work.
- Partial benefits if you can return to work in a reduced capacity.
It’s important to note that income protection does not cover redundancy, job loss due to a business closing or any pre-existing conditions that weren’t disclosed at the time of taking out your policy.
Claiming income protection through super
You can hold an income protection policy either separately through an insurer or via your superannuation fund. Claiming income protection through your super means the premiums are paid from your super balance, not your take-home pay.
This can make the insurance more affordable in the short term, but bear in mind that it will draw down on your retirement savings, which could sting your hip pocket when your golden years approach. Also, policies through super usually have stricter definitions of disability and fewer optional extras than standalone policies.
If you do end up going this route, it’s important to review your fund’s product disclosure statement (PDS) and make sure you know exactly what conditions and waiting periods apply. Not all super funds automatically include income protection, and benefit periods can sometimes be limited to just two years.
Is income protection insurance worth it?
For the vast majority of Australians, income protection insurance will provide you with a valuable financial safety net. If you’re self-employed, a sole trader or have limited sick leave entitlements, it’s practically a must.
Here are some questions to ask yourself when deciding:
- What are my financial obligations? Do you have a mortgage, school fees or other debts to cover?
- How much is in my ‘savings buffer’? How long could you survive without an income?
- What does my job security and benefits look like? Do you have sick leave, employer support or workers’ compensation?
- What about my dependents? Would your partner or children be financially hampered if you couldn’t work?
How much does income protection insurance cost?
The amount you pay in premiums will depend on your age, job, income, health history, waiting and benefit periods, as well as whether you smoke. Generally, higher-risk jobs and shorter waiting periods equal higher premiums.
Premiums can be paid either as ‘stepped’ (i.e. increasing with age) or ‘level’ (locked in at a higher initial rate). While stepped premiums are cheaper at first, they rise sharply as you get older.
Tax implications of income protection
If you take out income protection insurance outside of your super, your premiums are usually tax deductible. However, any benefits you receive from the policy are considered taxable income.
If the policy is held inside your super, you can’t claim the premiums as a personal tax deduction, but the benefits might still be taxed depending on your age and how the payments are structured.
Income protection vs health insurance
Income protection and health insurance both play an important role in your financial wellbeing, but they serve very different purposes. Health insurance helps cover the costs of your medical treatment, while income protection makes sure you can continue to take care of your household’s everyday living expenses if you’re unable to earn.
Ideally, these types of cover should complement one another, and having both gives you a much larger financial safety net.
Top 5 tips for choosing the right policy
- Compare providers: Not all policies are equal. Use an online comparison service or speak to your financial advisor to look at your options side by side.
- Check the benefit period: Decide how long you’d need support for if you couldn’t work.
- Understand exclusions: Be clear on what’s covered – and especially what’s not.
- Factor in your super: If your super includes income protection, check if it’s adequate or if you need a standalone policy.
- Get expert advice: Insurance policies tend to be fairly complex. A qualified financial advisor can help make sure you choose cover that truly meets your needs.
To sum up...
Income protection insurance in Australia gives you financial support during times when illness or injury is preventing you from working. Whether you choose to take out a standalone policy or claim income protection through your super, the right cover can really give you peace of mind and protect your family’s financial future.
It might not be fun to think about being out of action for weeks or months unexpectedly, but having the right plan in place can help you stay on top of your expenses while you focus on your recovery.
FAQ's
It usually covers up to 70% of your income if you’re temporarily unable to work because of illness or injury.
Yes, especially for self-employed Australians or those without much (or any) sick leave and very little in their emergency savings.
Yes, many super funds include this cover. It’s cheaper but usually comes with more restrictions – and might not be enough to cover you to a reasonable level.
No. It only covers you for illness or injury, not job loss due to redundancy or otherwise.
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