For the 14.5+ million working Australians, the ability to earn an income is their greatest financial asset. more valuable than their car, their home or their super balance. So, losing this potential to work and generate an income can have significant repercussions on anyone’s financial stability and goals for the future.
If that income suddenly stopped because of illness or injury, most households would feel the impact very quickly. Recent research suggests nearly half of Australians could only live off their savings for a month or less, with only around a quarter able to last six months or more without income.
That’s where income protection insurance can help. It’s designed to replace part of your income if you can’t work due to serious illness or injury, so you can keep paying the bills, looking after your family and staying on track with your goals while you recover.
This guide explains what is income protection, who it’s for, how it works, and how to start thinking about whether you might need it.
What is income protection cover?
Income protection cover is a type of insurance that may replace part of your income when illness or injury stops you from working. It gives you steady payments so you can stay on top of your regular expenses while you recover.
Most policies cover you for up to 70% of your pre-tax income for a set period. Some plans may cover you for longer duration claims or where you are able to work but not to your full capacity. This support can make a major difference during long recovery times or when sudden medical events interrupt your work.
In simple terms, it usually:
- Pays a regular monthly benefit, rather than a lump sum
- Covers up to around 70% of your pre-tax income, depending on the policy and insurer
- Continues to pay while you meet the policy’s disability definition and are within the benefit period
- Kicks in after a waiting period (for example, 30, 60 or 90 days)
Insurance Advisers Top Tip:
Don’t just look at the maximum % of income on the brochure. The definition of income (for example, how overtime, bonuses or variable income are treated) can vary between insurers and can make a real difference at claim time.
Who needs income protection?
Income protection can be valuable for anyone who relies on their pay to meet everyday costs. It is especially important for anyone who does not have large savings to fall back on or who supports others financially, such as kids or elderly relatives.
People who often benefit the most from income protection include:
- Employed people with ongoing financial commitments / living expenses.
- Contractors and self-employed workers who do not have sick leave.
- Families with a single main income.
- Homeowners with a mortgage or long-term loans.
- Anyone whose lifestyle would be heavily impacted if their income stopped.
A simple way to sanity-check your need is to ask
“If my income stopped for 6–12 months, what would I realistically cut and what would still need to be paid, no matter what?”
If the list of “must-pay” expenses is long, income protection is worth a closer look.
Why income protection insurance?
The majority of Australians believe that insuring their car and house is the most important insurance decision. This is worrying given that 36% of Aussies are in a position to live off savings for four months or more if they lost their source of income. 16% (or about 2 million Australians) are living day to day and they could only survive for one week or more if they lost their jobs.
According to the Financial Services Council (FSC), in 2019, there were 5.8 million Income Protection policies in force with 95% of lodged claims paid, 33% of which were as a result of an accident. Income protection gives you a safety net if the unexpected happens, just like a weather event impacting your home or a car accident.
How does income protection work?
How income protection works is by providing you with regular payments once you meet your policy conditions. After a waiting period, the insurer pays a percentage of your usual income until you return to work or reach the end of your benefit. This can vary depending if you are using income protection under superannuation or direct.
Most income protection insurance follows the same basic steps.
- You choose your cover at the start
- A serious illness or injury stops you from working
- You make a claim
- Monthly payments begin after the waiting period & typically end when you’re able to return to work (full-time or part-time, depending on the policy), or you reach the end of your benefit period.
What income protection covers:
What income protection covers specifically comes down to your cover. However, this may include:
- Payments replacing part of your regular income.
- Support while you recover.
- Partial benefits if you can return to work, but not at your full capacity.
If you’re currently earning an income and do not have Income Protection cover in place or you have an Income Protection policy which you haven’t reviewed within the last 12 months please get in touch with us today. Our experienced insurance brokers can help you find the right cover for your situation.
Income Protection FAQs
Will I be fine just with sick leave and annual leave
Sick leave and annual leave can help with short-term issues, but serious illnesses or injuries often last longer than a few weeks. Industry data shows disability income claims can continue for months or even years, especially for conditions like mental health issues or cancer.
Won't Workers’ compensation cover me for lost income?
Workers’ compensation generally only covers incidents directly related to your employment. Many injuries and illnesses, including those that happen at home or are unrelated to your job, may not be covered.
I’m young and healthy, I don’t need income protection yet
Younger people are not immune to accidents, illnesses or mental health conditions that can keep them off work for extended periods. In fact, mental health is now a leading cause of long-term claims across several insurance types, especially in younger people.
Is income protection right for me?
Income protection may be worth serious consideration if:
- Your household depends heavily on your income
- You’d struggle to cover 3-6 months of expenses without pay
- You’re self-employed, a contractor or don’t have access to generous sick leave
- You have a mortgage, business loans or other debts
- You want a financial buffer so a health event doesn’t become a long-term money problem
If you’re unsure where to start, you don’t have to figure it out alone. Speaking with someone can help you:
- Understand what you already have (for example, cover through super)
- Identify any gaps or overlaps
- Compare options and structures (including vs holding it outside super)
- Decide whether income protection is appropriate for your situation
If you’re currently earning an income and don’t have income protection in place, or you haven’t reviewed your existing policy in the last 12 months, it may be a good time to consider a review. You can discuss your options.
