Do you need income protection? Here’s how it works
For most Australians, our income isn’t just about covering the basics like rent or mortgage payments. It funds our lifestyle, pays for groceries, keeps the lights on, covers school fees, and even helps us plan for the future. But what happens if an unexpected illness or injury sidelines you from work for weeks, months, or even years?
That’s where income protection insurance comes in. It’s not about planning for the worst—it's about ensuring you can still manage life’s essentials without financial stress if you’re unable to work due to health reasons. Because while your job might pause, your financial responsibilities won’t.
Let’s break down how income protection works, what to consider when choosing a policy, and whether it’s the right fit for you.
What is income protection insurance?
Income protection insurance provides a monthly payment if you’re unable to work due to injury, illness, or a serious medical condition.
Unlike worker’s compensation, which only covers work-related injuries, income protection insurance covers both work and non-work-related illnesses and accidents.
💡 Stat: Over 3.4 million working Australians are underinsured for income protection, leaving them financially vulnerable if they can’t work. (Financial Services Council, 2022)
Key factors to consider when choosing income protection
There are three major things to think about when setting up income protection insurance: waiting period, benefit period, and benefit amount.
1. The waiting period ⏳
The waiting period is how long you’ll need to wait before you can start receiving payouts.
✅ Common waiting periods: 30 days, 90 days, or 2 years.
✅ If you have a 90-day waiting period and can’t work for only 60 days, you won’t receive any payout. But if your leave extends beyond 90 days, payments will kick in.
The shorter the waiting period, the higher the premiums.
💡 Tip: Choose a waiting period based on how much you have in savings. If you have 3-6 months of expenses saved up, you might opt for a longer waiting period to reduce premiums.
2. The benefit period 🏥
The benefit period determines how long you’ll receive payments while you can’t work.
Common benefit periods: 2 years, 5 years, or until age 65. If you have a 5-year benefit period but can never work again, your payments will stop after 5 years. If your benefit period is until 65, you’ll receive payments until then.
3. The benefit amount 💰
How much will you actually get paid? Income protection typically covers up to 70% of your pre-tax income.
Example: If your salary is $100,000, you can insure up to $70,000 per year. That’s a monthly payout of $5,833 (minus income tax, which the insurer deducts before paying you). The higher the benefit amount, the higher the premiums.
💡 Tip: Choose an amount that covers essential expenses like rent, mortgage, groceries, and bills—but doesn’t over-insure you.
Common myths about income protection
“I have sick leave, so I don’t need income protection” ❌
Annual and sick leave will only take you so far. If you’re out of work for months or years, that leave will run out fast.
“It’s too expensive” 💸
Income protection can be tax-deductible if paid outside of super. Plus, it’s cheaper than burning through your savings or selling assets.
💡 Stat: According to the ATO, premiums paid for income protection outside super may be fully tax-deductible. (ATO, 2024)
“I can get it through super” 🤔
Yes, you can! But superannuation-based income protection often has limitations, including:
✅ Shorter benefit periods (typically 2-5 years).
✅ Lower payout amounts than retail policies.
✅ No tax deductions for premiums paid through super.
💡 Tip: If you want long-term protection, check if your super policy is enough or consider a retail policy for better coverage.
Is income protection worth it?
If losing your income would put you under financial stress, then YES—income protection is worth considering. A financial adviser can help tailor a policy that suits your needs and budget.
"Your income is your greatest asset. Protect it like you would your home or car."
Resources:
🔗 Financial Services Council (FSC), 2022 | Australia’s Life Underinsurance Gap Report
🔗 Australian Securities & Investments Commission (ASIC) - Income Protection Guide: https://moneysmart.gov.au/income-protection
🔗 Australian Taxation Office (ATO) - Income Protection & Tax Deductions: https://www.ato.gov.au/Individuals/