Income protection insurance explained (Australia)

Most people insure their car and their home, but the thing that pays for both — their income — often goes uninsured. Income protection insurance replaces part of your earnings if illness or injury stops you working. It can be one of the most important covers you hold, and also one of the most misunderstood, because the fine print decides whether it actually helps when you need it.

What income protection pays

Income protection pays a monthly benefit while you are unable to work due to illness or injury — commonly up to around 70% of your pre-disability income, though this varies by policy. It is designed to keep the mortgage, rent, groceries and bills covered while you cannot earn.

It is different from the other personal covers people confuse it with:

• Income protection — ongoing monthly payments while you cannot work
• TPD (total and permanent disability) — a one-off lump sum if you are permanently unable to work
• Trauma / critical illness — a lump sum on diagnosis of a specified condition such as cancer or a heart attack
• Life cover — a lump sum paid to your beneficiaries when you die

The two numbers that define your policy

Two settings do most of the work in an income protection policy, and they directly affect both your premium and how useful the cover is:

• Waiting period. How long you must be off work before payments start — often 30, 60 or 90 days. A longer wait means a cheaper premium but you need enough savings or leave to cover the gap.
• Benefit period. The maximum time the policy keeps paying — for example two years, five years, or to age 65. Longer benefit periods cost more but protect against a long-term inability to work.

Stepped vs level premiums

You will usually choose how your premium behaves over time:

• Stepped premiums start lower but rise each year as you age. Cheaper early, more expensive over the long run.
• Level premiums start higher but are designed to rise more slowly, which can work out cheaper if you hold the cover for many years.

Inside super vs retail

Income protection can be held inside superannuation or as a retail policy outside super. Cover inside super is often cheaper and funded from your balance, but tends to be more basic and can lapse if contributions stop. Retail policies usually offer stronger definitions and features, at a higher cost. Many Australians hold cover inside super without realising the details — it is worth reading your super statement to see what you actually have.

Terms worth checking before you rely on it

• Whether it pays on an own occupation or any occupation basis
• How pre-existing conditions and exclusions are treated
• Whether benefits are indexed to keep pace with inflation
• How the benefit is reduced by other income or payments you receive
• When and how the policy can be cancelled or premiums re-rated