Income protection insurance pays part of your lost income if you’re unable to work because of a disability caused by illness or injury. It can help pay the bills so you can focus on getting better.

What income protection insurance covers

If you’re unable to work due to partial or total disability, income protection insurance pays:

• up to 90% of your pre-tax income in the first six months, and
• up to 70% for a specified time after six months.

Income protection insurance is designed to replace your income based on your annual earnings in the 12 months prior to your illness or injury. 

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.

Choosing an income protection policy

Some of the things you’ll need to consider when choosing an income protection policy are:

Policy type

Income protection policies are 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. If your income is variable, your insured amount will be based on average annual earnings over a period of time appropriate for your occupation. 
• 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.

From 31 March 2020, insurers can no longer offer agreed value policies to new customers. If you purchased an agreed value policy before this date, you can continue to hold this policy. If you decide to change policies, you will only be able to purchase an indemnity value policy.

Indemnity value policies are generally cheaper and can be useful for people with a stable income. 

Waiting period

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. You must be unable to work as a result of your illness or injury at the end of the waiting period to be eligible for payments. 

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.

Benefit period

The benefit period is how long the monthly payments will last if you remain unable to work due to your illness or injury. 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 impact on how much your premiums will cost now and in the future.