How does income protection work?

Content Producer · 3 April 2018
You never know when a tragedy may strike that will leave you unable to work and support your family. That’s where income protection can step in to help you continue to pay the monthly bills and maintain your lifestyle.

Income protection insures one of your most important assets, your income. This type of insurance is designed to pay you a benefit if you are unable to work for a period of time because of illness or injury. Income protection insures you for a set level of income, often 75% of your pre-tax income, and will pay you until you can return to work or for the agreed period – whichever is sooner.

Case Study

At 42, Mark, a father of three and an accountant on an annual pre-tax salary of $85,000, was diagnosed with skin cancer. Due to his condition and invasive treatment he was unable to continue with work.

Luckily, Mark had income protection insurance. Mark’s income protection paid a monthly benefit of $5,313, which was 75% of his pre-tax income. This monthly benefit allowed him to continue to support his family and helped to relieve the burden of on-going living expenses such as the mortgage, school fees and household bills.

After some time, Mark was on his way to recovery. His treatment was successful and he was able to return to work, at which point the benefits he was receiving from his income protection stopped.

If you were left unable to work due to injury or illness having income protection insurance may allow you to weather the storm better. Through the Canstar website you can compare income protection insurance policies to find a policy that suits your needs.

Interested in income protection insurance? Start comparing providers below.

The table below displays a snapshot of policies with links to providers’ websites, based on a non-smoking male aged between 30-39 years old, who works in trades and services. The results below are sorted by Star Ratings, from highest to lowest. Before committing to any particular policy, check upfront with your provider and read the PDS to confirm whether it meets your needs.

 Some key terms to get you started

There are a number things to consider when comparing and purchasing income protection insurance, these include:

  • The sum insured amount
  • The waiting period
  • The benefit period
  • Partial disability cover

Understanding these terms should allow you to better assess which policy may be right for you.

The sum insured amount: The actual amount of benefit that you will potentially be paid each month if you are off work due to sickness or injury. This is typically up to 75% of your regular monthly income, with a cap at a certain dollar amount per month. A policy is typically more expensive with a higher sum insured amount.

Benefit period: The maximum length of time for which you may receive monthly payments from your insurance provider if you are sick or injured to the point where you can’t work. A policy is typically more expensive with a longer benefit period.

Waiting period: The number of days you need to be off work after an accident or illness before you may be eligible to start receiving monthly payments from your insurer. This is not the same as for health insurance, where the waiting period starts from when you first buy your insurance policy. A policy is typically more expensive with a shorter waiting period.

Partial disability benefit cover: Some insurers offer a partial disability benefit as an optional extra, which covers you if you return to work but at a reduced capacity (e.g. part-time). If you have been off work due to sickness or injury and you then return to partial work duties, you could receive a reduced monthly benefit until your benefit period ends or you return to work completely (whichever happens first).

How to buy for Income Protection?

Whether you are reviewing your policy or applying for income protection for the first time, organising it is easier than ever before.

There are two main ways to purchase income protection.

  1. Directly from an insurer (Direct Income Protection Insurance)
  2. Through an Adviser (Advised Income Protection Insurance)

As advised income protection is purchased through a financial adviser you will typically be provided with insurance specific to your situation. However, this is often the more time-consuming option as advisers will generally take you through your insurance needs in person and will ask about your budget, personal information, living situation, information on your family and more.

Purchasing income protection insurance directly takes out the middle man and leaves it to you to decide how much cover you will need as well as the benefit and waiting period that suits you. If you do decide to go direct, you will need to do your homework and check exactly what you are signing up for.

Thankfully, Canstar makes it easier to compare direct income protection insurance. As Australia’s biggest financial comparison website, we compare more brands than any other. Our expert researchers also rate financial products by comparing the price and features of each policy to help you find products that offer outstanding value for money.


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