What income protection insurance covers
Income protection insurance pays up to 85% of your pre-tax income for a specified time if you’re unable to work due to partial or total disability.
Each income protection policy has its own definition of partial or total disability that must be met before a claim is made. Check the insurer’s website or the product disclosure statement (PDS) for the definition and any exclusions.
Your income protection policy will have a waiting period before payments start due to loss of income through injury or illness.
Income protection insurance doesn’t cover you for lost income because you are stood down or become unemployed.
Deciding if you need income protection insurance
Income protection insurance can be important if you:
- are self-employed or a small business owner, as you may not have sick or annual leave
- have family members or dependents that rely on the income you earn
- have debt, such as a mortgage, you’ll need to make payments on even if you’re unable to work
To work out how much income protection you need, prepare a budget. This will help you see your monthly expenses and the income you’ll need to replace. You may want to factor in making payments to your super as well.
- if you have total or permanent disability or trauma insurance, that can help replace lost income
- if you have private health insurance that could help pay for any medical expenses
- what help or support from family or friends may be available
If you need help deciding if you need income protection insurance and how much, speak to a financial adviser.
Choosing an income protection policy
Some of the things you’ll need to consider when choosing an income protection policy are:
Income protection policies are provided as either an:
- Indemnity value policy — the amount you’re insured for is a percentage of your salary when you make a claim. If your salary has decreased since you bought the policy, you’ll get a smaller monthly insurance payment. Indemnity value policies are generally cheaper and can be useful for people with a stable income.
- Agreed value policy — the amount you’re insured for is a percentage of an agreed amount when you sign up for the policy. These are generally more expensive but can be useful if you have income that changes from year-to-year.
This is the amount of time you must wait before your payments start. Most income protection policies offer a waiting period between 14 days and two years.
In general, the longer the waiting period, the cheaper the policy. When you’re choosing the waiting period, think about how much you have in sick and annual leave, savings and emergency funds.
The benefit period is how long the monthly payments will last. Most income protection policies offer two or five years, or up to a specific age (such as 65). The longer the benefit period, the more expensive the policy. But it also means greater protection if you’re unable to work for a longer time.
Stepped or level premiums
You can generally choose to pay for income protection insurance with either:
- Stepped premiums — recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
- Level premiums — charge a higher premium at the start of the policy, but changes to cost aren’t based on your age so increases happen more slowly over time
Your choice of stepped or level premiums has a large