Income Protection Insurance Australia

Income protection insurance is a valuable form of financial security for individuals and families in Australia. This type of cover offers you peace of mind by paying out a benefit if an injury or illness prevents you from working. With the rising cost of living and uncertain economic climate, income protection insurance can provide peace of mind and security for you and your loved ones.

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What is income protection?

Income protection is a type of insurance policy that provides financial support if you were to lose your income unexpectedly due to an illness or injury. This type of insurance is designed to cover a portion of your regular income, generally up to 70% of your pre-disablement income, which you can use to cover your monthly expenses

The policy pays out a regular monthly benefit until you can return to work, no longer meet the eligibility criteria or until the end of the policy term, whichever comes first. The amount of income protection cover you will require typically depends on your personal circumstances. Income protection is a valuable type of insurance for those who rely on their income to support themselves and their families, particularly those who are self-employed or who do not have significant savings, annual or sick leave to fall back on in the event of sickness or injury.

Do I need income protection?

Whether or not you need income protection insurance depends on your circumstances and financial requirements. Income protection insurance could be a smart investment if you have a mortgage or other significant financial obligations that rely on your income, such as rental properties or investment portfolios. This type of coverage can help you maintain your financial commitments even if you’re unable to work due to illness or injury.

Suppose you have financial dependents, such as children or elderly parents. In that case, income protection insurance can ensure they have the financial support they need to maintain their current lifestyle if they cannot work. If you’re self-employed or have limited sick leave, then income protection insurance can provide you with a financial safety net in case of unexpected illness or injury.

Built-in Benefits of income protection in Australia

Typically, there are several common built-in benefits, which may enhance your income protection policy and provide you with extra cover. Although these benefits differ slightly depending on whom you’re insured with, common built-in benefits include:

Optional extras

You can typically enhance your policy with additional options to give yourself greater coverage. These generally come with a higher premium.

However, referring to the relevant PDS for the full list of features and benefits is generally a good idea.

Factors that impact your income protection premiums

  1. Your monthly benefit: Generally, the higher your monthly benefit is, the more expensive your premiums are. Currently, insurers offer you the option to cover up to 70% of your income.
  2. Your choice of waiting period: Insurers usually offer you a selection of waiting periods. This is the time between becoming disabled and unable to work and when you start accruing your monthly benefit. Usually, it is anywhere between one month, two months,three months, six months, a year or two years. Your premiums are typically higher when the waiting period is shorter because a claim can be paid for less severe illnesses or accidents.
  3. Choice of benefit period: The benefit period is the maximum amount of time you continue to receive your benefit payments. Depending on the insurer, it generally ranges from 2 years to 5 years or up to your age 65 or 70. The longer your benefit period, the higher your premium will generally be since you potentially get paid for a longer period, and the insurer covers a higher risk.
  4. Your occupation: The occupational hazards at work affect the cost of your premium. For example, a firefighter or policeman would pay more premiums than someone who works at a grocery checkout or in an office. 
  5. Built-in benefits: Some policies might be more expensive because they include a broader range of built-in benefits. Others might be cheaper because they only provide a few basic benefits.
  6. Smoking Status: Smokers tend to pay more for their premiums because of the increased risk to their health. You are generally described as a non-smoker if you have not smoked for the last 12 months.
  7. Your age: Premiums tend to increase with age. Young people generally pay less because their health risks are lower.
  8. Gender: Generally, women tend to pay higher income protection premiums than men because women usually make more income protection claims.

How to compare income protection policies in Australia

Generally, the best income protection policy for you meets your unique requirements. To find a policy that may meet your requirements, comparing policies from several different insurers is a good idea. Consider looking at the following:

How much does income protection insurance cost?

Generally, your income protection premium is calculated according to several different aspects. These include your age, gender, smoking status, occupation, monthly benefit, waiting period, benefit periods and other questions you may be asked during the application process. 

Compare policies from leading insurers

Insurance companyPolicyMonthly premium
MLCIncome Assure$25.89
NEOSProtection – Income Support Standard$26.68
OnePathOneCare – Income Secure Protection$29.98
Protect – Income Cover$31.15
TALAccelerated Protection – Income Protection Focus – Short BP$39.91
Wealth Protection – Income Safeguard$41.52

Source: Life Insurance Direct Comparison Engine (April 2023; Premium estimates are based on a 2-year benefit period and a 30 days waiting period for anretail (advised) policy for a non-smoking 30-year-old male living in NSW earning $48,000 per year.)

Is income protection insurance tax deductible?

Yes, typically the premium is  tax-deductible when held in your name, as it protects your salary and gives you an income if you’re unable to work because of an illness or injury. The amount you can claim will typically depend on your marginal tax rate. However, you’ll have to pay tax on your monthly benefit because it is treated as an income replacement.

We make it easy for you to compare policies online with our powerful comparison engine.

Buy with confidence today for peace of mind tomorrow.

2021 changes to income protection insurance policies in Australia

At the end of 2019, APRA announced that insurers needed to make several changes to their policies to ensure the viability of income protection in the future. Changes started being implemented in March 2020 when insurers took Agreed Value policies off the market. This was followed up by changes to monthly benefits, new disablement definitions being implemented and alterations to how your income at risk is assessed.

Types of policies available before the March 2020 reforms

Before the first set of changes mandated by APRA, you would generally have the option to choose between one of three different policy types: agreed value, indemnity value and guaranteed value cover. However, if you were to apply for a new income protection policy today, you could only apply for indemnity value cover.

Older policies generally offered you these options:

  1. Indemnity Value income protection: Indemnity value policies are usually cheaper than Agreed value policies, but it does not guarantee your monthly benefit. With an Indemnity policy, your monthly benefit will be the lesser of 75% of your pre-disablement income or your insured monthly benefit. Therefore, you may receive a lesser monthly benefit if your income reduces after taking out the policy.
  2. Agreed Value Income Protection: Premiums are generally more expensive than Indemnity policies. However, an Agreed Value policy might suit people with fluctuating incomes because your monthly benefit is determined when you apply for your policy, essentially locking in your monthly benefit. The insurer will calculate your benefit using the financial records you provide at application time instead of claim time.
  3. Guaranteed agreed value: Select insurers will offer this income protection policy type, which converts your agreed value policy to guaranteed agreed value upon presenting proof of income. To receive such a policy, the insurer will confirm your monthly benefit based on the financial statements you provided during application time.

Own-occupation changed to Any-occupation disablement definition.

In the recent changes adopted by most insurers, how disablement is defined in your income protection policy has become much more stringent. Legacy policies typically have an “Own-occupation” definition. 

Typically, this means that if you are unable to work for longer than the waiting period following the recommendation of a medical professional because you became ill or were injured. Then, you could claim the full amount if you can’t perform at least one of your important income-producing activities for your occupation and do not work in any other occupation.

However,generally if you were to buy a policy following the 1 October 2021 income protection changes, then the disablement definitions on your policy will change to “suitable work”. The definition of “suitable work” changes depending on how long you receive your monthly benefit. For the first 24 months of being on claim, disability is defined as being unable to perform all the important income-producing duties of suitable work in your regular occupation. After this period, your insurer will generally change the definition of suitable work. At this point, suitable work is defined as your ability to return to work in any occupation. Select insurers offer an up to 5 year Own occupation definition policy.

Alterations to the calculation of your pre-claims earnings

Previously, select policies allowed your pre-claims earnings to be calculated according to the best 12 consecutive months of earnings over 2 or 3 years. This allowed individuals who earn a fluctuating income to choose to have their income assessed based on the 12 consecutive months of their highest earnings.

New policies are typically calculated according to the income you earned in the 12 months before you make a claim. If you earn a variable income, select insurers may assess your income based on your average earnings over two years.

75% monthly benefits reduced to 70%

A significant change implemented after the October 2021 changes is the reduction of monthly benefits that you’ll be able to claim. Older policies typically allow you to secure up to 75% of your monthly income, with some insurers offering up to 80% coverage.

However, policies available after 2021 typically only cover up to 70% of your income. Some insurers may offer you the option to cover 90% of your income for a maximum of 6 months. Others also reduce the monthly benefit to 60% or lower after two years on a claim.

Frequently asked questions and answers.

  • How does income protection work?

    Income protection insurance provides a benefit to replace your salary or wages if you cannot work due to illness, injury or disability. The insurance is purchased with a waiting period and a benefit period. Once a claim is made and accepted with medical evidence, payouts are calculated according to your pre-illness income and the waiting and benefit periods selected. It’s important to understand the terms and conditions of the policy as not all illnesses or injuries are covered.
  • What does income protection not cover?

    It’s important to note that there are certain exclusions and limitations to what income protection insurance covers. These may include pre-existing conditions, pregnancy and childbirth-related issues (unless specified in your policy), and redundancy or loss of employment (typically not covered). Reviewing your income protection policy and understanding what is covered and what is not before purchasing it is essential.
  • Who is eligible for income protection?

    Income protection typically applies to individuals who earn an income and work a minimum average number of hours each week. This includes employees, permanent contractors, and those self employed business owners. However, eligibility for income protection insurance may vary based on factors such as age, occupation, health, and income level.
  • Does income protection cover pre-existing conditions?

    Yes, it can. However, only in certain cases depending on the circumstances. Therefore, it is important that you disclose all pre-existing medical conditions to the insurer at application time for them to assess and confirm if they can cover the condition or not. Each insurer assesses your situation differently, so you may want to consider several insurers.
  • What is needlestick cover?

    Needlestick Cover is a unique benefit typically available in income protection policies designed to protect medical professionals from needle stick injuries. It can potentially include protection against splash injuries sustained during their normal working duties when meeting the Product Disclosure Statement (PDS) definition.

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