How does income protection work?

Russell Cain Updated: 29 September 2021

If you are unable to work because you’ve gotten ill or suffered an injury, are you sure that you’ll be able to take care of your day to day living expenses? Income protection insurance is typically designed to provide you and your family with financial security if you’re unable to earn an income.

Learning more about how income protection works will help you make the best decision for you and your loved ones. Discover what’s covered by your policy, the difference between waiting and benefit periods and how premiums are calculated.

What is income protection cover?

Income protection is a type of life insurance policy that pays you a monthly benefit of up to 70% of your regular income if you are injured or sick and cannot work longer than the waiting period. Generally, you’ll continue to receive this benefit until you’re able to return to work or if you reach the end of your maximum benefit period.

Typically, you’ll be able to use the benefits from this type of insurance policy to cover your ongoing expenses. This allows you to focus on your recovery instead of worrying about paying your debts, mortgage, and other daily living costs.

The benefits of income protection

There are several significant benefits associated with purchasing this type of policy. A few of these benefits include:

  • An income when you aren’t able to work: Typically, an income insurance policy can offer you peace of mind when you get sick or are injured as it pays up to 70% of your gross income as a monthly benefit.
  • Can be tailored to suit your requirements: You’ll usually have the option to add additional policy options to your cover for cover that suits your needs. Examples of optional benefits include critical illness, Day 1 accident cover and Plus policies.
  • Tax-deductible: Premiums for this type of insurance policy are typically
    tax-deductible because it protects your income by paying you a monthly benefit if you can’t work. However, as a result, any benefits paid to you will be assessed as part of your income, so you’ll need to pay tax on the benefits paid to you.

Benefit periods vs. Waiting periods

Income protection waiting period

This is the period you’ll need to be off work before you can claim income insurance benefits. This period begins once your doctor says that you can’t work because of the illness or injury you suffer from. Typically, you’ll be able to choose between several different income protection insurance waiting periods. However, the shorter the waiting period, the more expensive your premiums.

Income protection benefit periods

Your benefit period refers to the maximum amount of time that you’ll be allowed to claim your monthly benefit. This period starts on the first day after your waiting period ends. Similarly to waiting periods, you have the option to choose between several different benefit periods. However, it’s important to note that you’ll pay more for extended benefit periods.

How your premiums are calculated

The following factors are typically taken into consideration when calculating your income insurance premiums:

Your age
Gender
Your job
Smoking status
The monthly benefit you select
Length of your waiting period
Length of your benefit period
Your policies built-in benefits
Any additional options you opt for
Less any healthy lives discounts provided

Frequently asked questions and answers

  • What does income protection cover?

    Your income insurance typically covers your ability to make money. This type of policy pays out up to 70% of your income for a maximum benefit period. You’ll be able to use these benefits to cover your expenses while you focus on recovering and returning to work.
  • When can you claim income protection?

    Generally, you’ll be able to lodge a claim for your income protection soon as you anticipate you will be off work for longer than the waiting period. However, if you have an extended waiting period, you may not need to claim your benefits as you’re more likely to recover before the waiting period ends.
  • How long can you be on income protection?

    You’ll generally be able to claim your income protection so long as you continue to meet the disablement claim eligibility criteria for the maximum length of your benefit period as outlined in your policy documents. Benefit periods are commonly available for 2 or 5 year periods or up to a certain age, like 65 or 70.

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