General Advice Warning: The information below is general in nature. It does not take into account your personal objectives, financial situation, or needs. You should consider whether this information is appropriate for you before acting on it, and consider seeking advice from a qualified financial adviser.
What is income protection insurance?
Income protection (IP) insurance pays a regular monthly benefit — typically up to 70% of your pre-disability income — if you are unable to work due to illness or injury. Unlike life insurance or TPD, which pay lump sums, income protection provides an ongoing income stream to help you meet day-to-day expenses while you recover.
It is often described as the most important type of personal insurance because your ability to earn an income is typically your most valuable financial asset. For someone earning $100,000 per year with 25 working years ahead of them, their future earning capacity represents $2.5 million or more.
Who typically considers income protection?
Income protection is commonly considered by anyone who relies on their ability to work to meet financial commitments. This includes:
- Employees (PAYG) who would struggle to meet expenses if their income stopped
- Self-employed people and business owners who don't have access to employer-funded sick leave
- People with a mortgage, car loans, or other regular financial commitments
- Families where one income supports most of the household expenses
- People in physically demanding occupations with higher risk of injury
- Anyone without sufficient savings to cover an extended period off work
How does it work?
You apply for a policy with a chosen monthly benefit amount (up to 70% of your gross income, plus in some cases a superannuation contribution component). If you become unable to work due to illness or injury, you serve a waiting period, after which the insurer pays your monthly benefit for the duration of your disability or until the benefit period ends — whichever comes first.
Waiting period
The waiting period is the time between when you stop working and when benefit payments begin. Common options include:
- 30 days — shorter wait, higher premiums. May suit self-employed people with limited sick leave.
- 60 days — a middle-ground option.
- 90 days — longer wait, lower premiums. May suit employees with sick leave or savings to cover the initial period.
The waiting period you choose should generally align with how long you could sustain yourself without income — considering any sick leave, annual leave, or emergency savings you have available.
Benefit period
The benefit period is the maximum length of time the insurer will pay the monthly benefit for a single claim. Common options include:
- 2 years — covers shorter-term disabilities. Lower premiums but limited protection for serious long-term conditions.
- 5 years — a mid-range option providing reasonable protection for more extended periods of disability.
- To age 65 — the most comprehensive option, providing income replacement until retirement age. Higher premiums but protects against the worst-case scenario of never returning to work.
Something to think about: The benefit period is one of the most impactful choices in an income protection policy. A 2-year benefit period is significantly cheaper than a to-age-65 benefit period, but it leaves you exposed if a serious illness or injury prevents you from working for longer than two years. Many people find that a 5-year or to-age-65 benefit period provides better peace of mind, particularly for conditions like cancer, mental health issues, or musculoskeletal injuries that can involve lengthy recovery periods.
How your benefit is calculated — indemnity
Income protection policies use an indemnity basis to calculate your benefit at claim time. This means your monthly benefit is based on your actual income in the period (typically 12 months) prior to your disability, up to the maximum insured amount you selected when the policy was taken out.
In practice, this means the insurer will pay the lesser of your insured monthly benefit or 70% of your pre-disability income. If your income was lower than expected in the period before your claim — for example, if you had reduced hours, taken unpaid leave, or experienced a downturn in business — your benefit may be lower than the maximum insured amount.
Something to think about: The indemnity structure means it is important to keep your sum insured aligned with your actual income. If your income increases significantly, you may wish to review your cover to ensure the insured amount still reflects your earnings. Conversely, if your income drops, be aware that the benefit at claim time will reflect your actual earnings, not the higher insured amount.
Key features to understand
Definition of disability
Income protection policies typically use one of several definitions to determine whether you are "disabled" for the purposes of a claim:
- Unable to perform your own occupation: You cannot perform the duties of your usual occupation. This is the broadest and most favourable definition.
- Unable to perform any suited occupation: You cannot perform any occupation suited to your education, training, or experience. This is narrower and may apply after an initial period of "own occupation" cover (e.g. own occupation for the first 2 years, then any suited occupation for the remainder of the benefit period).
Superannuation contribution benefit
Some income protection policies include (or offer as an optional extra) a superannuation contribution benefit. This pays an additional amount (typically up to 11–12% of your pre-disability income) directly into your super fund while you're on claim, helping to maintain your retirement savings during a period of disability.
Partial disability / return to work benefit
If you return to work in a reduced capacity (e.g. part-time hours or lighter duties), many policies will pay a partial benefit that tops up your reduced income. This encourages rehabilitation and return to work without a sudden loss of benefit.
Recurring claims
If you recover and return to work but then become disabled again from the same or related condition within a specified period (typically 6–12 months), most policies treat this as a continuation of the original claim rather than a new claim. This means you don't need to serve another waiting period.
Income protection inside super vs outside super
Income protection can be held inside or outside super, and the differences are significant:
- Inside super: Premiums are paid from your super balance. However, benefits paid from super-held IP are treated as assessable income and taxed at your marginal rate. The maximum benefit is typically limited to 70% of income. Premiums paid within super are tax-deductible to the super fund. Policies held inside super may have a maximum 5-year benefit period.
- Outside super: Premiums are paid from personal cash flow but are generally tax-deductible for individuals, which effectively reduces the net cost. Benefits are treated as assessable income and taxed at your marginal rate. You generally have access to a wider range of features and to-age-65 benefit periods.
Tax deductibility: One of the key advantages of holding income protection outside super is that premiums are generally tax-deductible to the individual. For someone on a 37% marginal tax rate, this means the after-tax cost of premiums is significantly reduced. For example, a $200/month premium effectively costs around $126/month after the tax deduction.
How much income protection do people typically consider?
The maximum monthly benefit available is generally 70% of your gross monthly income (some insurers also offer a superannuation contribution component on top of this). The amount you choose depends on:
- Your monthly financial commitments (mortgage, bills, living expenses)
- Any other sources of income or support you might have during a disability (partner's income, savings, leave entitlements)
- The premium cost you're comfortable with
Many people insure the maximum 70% of their income, but some choose a lower amount if they have other resources or if premium cost is a concern.
Common questions
Does income protection cover mental health?
Most income protection policies do cover mental health conditions (such as depression, anxiety, or PTSD), though some policies may apply specific limitations — such as a shorter benefit period for mental health claims (e.g. 2 years instead of to age 65). Mental health conditions are one of the most common reasons for income protection claims. It's important to check the specific terms of any policy regarding mental health cover.
Am I covered if I lose my job?
No. Income protection covers inability to work due to illness or injury — not unemployment, redundancy, or business downturns. If you voluntarily stop working or are made redundant while healthy, income protection will not pay a benefit.
What happens to my policy if I change jobs?
Your income protection policy generally continues regardless of job changes. However, if your occupation changes significantly, it may affect your premium rate or terms at renewal. If you move from employment to self-employment (or vice versa), this can also affect how your benefit is calculated at claim time under an indemnity policy.
Can I claim while still doing some work?
Yes — if you are partially disabled and able to do some work but not your full duties, most policies provide a partial or proportionate benefit. This is designed to support your return to work without a sudden loss of income support.
How long does it take to receive a payment after a claim?
After lodging a claim, you need to serve the waiting period you selected when the policy was taken out (30, 60, or 90 days). After the waiting period, the insurer will assess your claim, which may involve reviewing medical evidence and potentially requesting independent medical examinations. Payment typically begins within a few weeks of the waiting period ending, though complex claims may take longer.
Next steps
If you'd like to explore whether income protection might be relevant to your situation: