Monthly Benefits Income Protection: How Much You Could Receive
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What is a monthly benefit in income protection?
A monthly benefit is the amount your insurer pays you each month if you’re unable to work due to illness or injury. It’s calculated based on your income and designed to replace a portion of your earnings while you recover. Most policies insure up to around 70% of your personal exertion income, which is the income you earn directly from working. This means passive income, such as rent or dividends, is usually not included in your benefit calculation.
How much does income protection pay per month?
Most income protection policies pay up to 70% of your pre-tax income if you’re unable to work due to illness or injury. Your monthly benefit is calculated based on a percentage of up to 70% of your pre-disability income. The monthly benefit typically starts to acrue after your waiting period ends and will start to pay you your monthly benefit 30 days in arrears until you are able to return to work, your benefit period ends, your policy expires or you no longer meet the claim requirements.
How is your monthly income protection benefit calculated?
Your monthly benefit is calculated based on your pre-disability income, usually assessed over the 12 months before you stop working. For some policies or variable incomes, insurers may use a longer averaging period.
Insurers will generally pay the lower of the insured percentage (e.g. 70%) or the sum insured, especially in the early claim period. Over time, benefits may be adjusted depending on your policy and ongoing income.
The calculation typically follows these steps:
- Assess your personal exertion income
- Apply the benefit percentage
- Apply caps or limits
- Adjust for other income sources
Indemnity vs agreed value policies
| Type | How it works | Key consideration |
|---|---|---|
| Indemnity value | Based on your income at the time of claim | If your income drops, your benefit may also drop |
| Agreed value | Based on income when you took out the policy | No longer available for new policies. Existing policyholders who hold agreed value cover prior to March 2020 may retain it. |
Understanding this difference is important, as it can significantly affect how much you receive.
When do monthly payments start? (Waiting periods explained)
Income protection doesn’t start paying immediately.
You’ll need to serve a waiting period, which is the time between when you stop working and when payments begin.
Common waiting periods include:
- 14 days
- 30 days
- 60 days
- 90 days
- 6 months
- 1 year
- 2 years
During this time, you won’t receive any payments, so it’s important to have some savings, sick leave or other support available. Generally, choosing a longer waiting period can reduce your premiums.
How long do monthly benefits last?
The benefit period is how long your insurer will continue to pay you.
Common options include:
- 1 year
- 2 years
- 5 years
- Up to age 65
- Up to age 70
A longer benefit period usually provides greater financial security, but may increase the cost of your policy.
What can reduce your monthly benefit?
Your monthly benefit can be reduced by several factors, especially due to offset clauses included in most policies. These clauses ensure you don’t receive more income while disabled than you did while working.
Common reductions include:
- Workers compensation or accident compensation payments
- Other disability insurance benefits
- Employer-paid leave (such as sick leave or annual leave)
- Centrelink or other government payments
These offsets limit total income and can significantly reduce your final monthly payment.
How income works for employees vs self-employed
The way your income is assessed depends on whether you’re an employee or self-employed. Employees are usually assessed based on salary, wages, and sometimes bonuses or overtime. For self-employed individuals, income is typically based on profit after business expenses, not total revenue. This means your insurable income may be lower than expected.
Insurers may also assess income differently for new businesses or fluctuating earnings, sometimes averaging income over time.
What if you recently became self-employed?
If you have recently moved from employment to self-employment, it is worth being aware that some insurers apply a newly self-employed clause to your policy.
This clause typically applies during the first 12 months of self-employment. If you make a claim during this period, the insurer may calculate your pre-disablement income based on your average monthly earnings from the policy start date to the date you became disabled, rather than your income in the 12 months before the claim. In practice, this can result in a lower monthly benefit than expected, because a new business often takes time to reach the same income level as previous employment.
Once you have been self-employed for 12 months or more, the standard pre-disablement income calculation generally applies. If you have recently made the move to self-employment, it is worth checking whether your policy includes this clause and understanding how it could affect a claim.
Are income protection payments taxable?
Income protection payments are generally treated as taxable income. This means the amount you receive will usually be reduced after tax. Because of this, your take-home benefit may be lower than expected. It’s important to consider the after-tax amount when planning your finances.
Are income protection premiums tax deductible?
Yes, income protection premiums are generally tax deductible in Australia when the policy is held in your own name. This is because the cover is designed to protect your income, so the ATO typically treats the premiums as a deductible expense.
The amount you can claim back will depend on your marginal tax rate. For example, if you pay $1,200 per year in premiums and your marginal tax rate is 34.5% (including Medicare levy), your after-tax cost would be closer to $786.
It is important to note that this deductibility applies to personally owned policies. Premiums paid through superannuation are generally not deductible to you personally, though they may be deductible to the super fund. You should speak with a tax professional to confirm how this applies to your circumstances.
Is income protection worth it based on the monthly benefit?
Income protection can provide valuable financial support if you’re unable to work. While it doesn’t replace your full income, it can cover essential expenses and reduce financial stress. The key is understanding how much you would actually receive and whether that amount aligns with your lifestyle. This helps ensure your cover is realistic and effective when you need it most.
Frequently Asked Questions and Answers
What is the monthly benefit of income protection?
The monthly benefit is the amount your insurer pays you each month if you’re unable to work due to illness or injury. It’s designed to replace part of your income so you can continue covering essential expenses. This payment is usually based on your pre-tax income before you stopped working. Rather than replacing your full salary, it provides a partial income to help reduce financial stress while you recover.How much do you get paid on income protection?
Most income protection policies pay up to 70% of your pre-tax income. Policies issued before October 2021 may have offered up to 75%, however this is no longer available for new applicants. The exact amount depends on your earnings, policy terms, and any limits set by the insurer. There is usually a maximum monthly cap, which can restrict how much you receive, even if your income is higher. Your benefit may also be adjusted based on other income or your ability to return to work.Can you get Centrelink while on income protection?
In some cases, you may still be eligible for Centrelink payments while receiving income protection. However, these payments are often treated as additional income and may reduce your insurance benefit. Insurers typically apply offsets to ensure you don’t receive more than a certain percentage of your pre-disability income. It’s important to check your policy to understand how these interactions work.What happens if I lose my job while on income protection?
If you’re already receiving income protection payments, they may continue even if your employment ends. This depends on your policy terms and whether you still meet the definition of disability. However, for new claims, you generally need to be employed at the time you become unable to work. This means income protection is usually linked to your ability to earn an income before the claim starts.Is income protection enough to live on?
For many people, income protection can be enough to cover essential living costs like housing, food, and bills. However, because it usually replaces only a portion of your income, it may not fully support your current lifestyle. You may need to adjust your spending while receiving benefits, especially for discretionary expenses. The value of income protection comes from providing financial stability during a period when your income would otherwise stop completely.
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