What is Income Protection Insurance?

In this article, we weigh the pros and cons of income protection insurance, break down what is included in the average policy and discuss prices and frequently asked questions. After reading this article, you should have no problem deciding whether or not income protection insurance is an appropriate product for you.


Life is dangerous. In the modern world, we are all running around busier than ever, getting less sleep and working more hours to keep up with soaring costs of living. Due to this extra fatigue, many of us can develop chronic health conditions, or make critical mistakes on the job which lead to injuries and an inability to perform our occupational duties.

Enter income protection insurance. In this article, we break down exactly what kind of insurance it is, who may be best suited to purchasing a policy and the pros and cons of having it. We also explore some frequently-asked questions that many income protection insurers receive, providing you with a comprehensive guide allowing you to determine if you may benefit from purchasing a policy.

CaptainFI is not a Financial Advisor and the information below is factual review information, not financial advice. This website is reader-supported, which means we may be paid by advertising on the site, or when you visit links to partner or featured sites. For more information please read my Privacy PolicyTerms of Use, and Financial Disclaimer.

What exactly does Income Protection Insurance cover?

Income protection insurance, generally speaking, covers the policyholder for loss of income associated with partial or total disability, the definitions of which vary slightly between insurers. For this reason, it is essential that anyone considering taking out an income protection insurance policy carefully reads the fine print, including their potential insurers’ websites and any relevant Product Disclosure Statements (PDS) to see what is and isn’t included.

For most insurers, however, satisfying the definitions of total or partial disability means that you are following advice from a medical professional, are unable to perform one or more duties associated with your employment and that your income is less than your pre-disability income. The Australian government’s MoneySmart website1 provides more information on income protection insurance.

insurance policies
Income protection insurance does not cover a policyholder for loss of employment that is due to being fired, stood down, or made redundant.

Does income protection cover loss of job?

A somewhat common misconception is that income protection insurance covers the policyholder should they lose their employment due to being stood down or made redundant. This is entirely false and highlights the importance, as mentioned earlier, of always reading the fine print before purchasing any type of insurance.

Income protection insurance only covers loss of employment associated with total or partial disability as defined in each individual policy.

What does income protection insurance NOT cover?

As outlined above, income protection insurance does not cover a policyholder for loss of employment that is due to being fired, stood down, or made redundant. It should also not be confused with other types of insurance, like life insurance, professional indemnity insurance or public liability insurance, which each offer their own types of coverage.

Income protection insurance also does not cover intentional or self-inflicted acts that lead to partial or total disability. In most cases, side effects of a regular, uncomplicated pregnancy are not covered, nor is any loss of income caused due to an act of war. Visit the website of an insurer like TAL2 to learn more about what is and isn’t covered in a typical income protection policy.

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


What illnesses are covered by income protection?

While individual policies may differ slightly, the overwhelming majority of income protection insurance policies do not disqualify any particular illnesses or conditions that cause total or partial disability. As long as a policyholder’s condition doesn’t fall into any of the categories above that typically don’t receive cover, they should be able to make a successful claim in some form should they become totally or partially disabled.

income protection insurance
The pay from an income protection insurance policy is unfortunately taxable as regular income.

Is it hard to get approved for Income Protection Insurance?

On their website, Finder3 states that they believe making an income protection insurance claim to be “really easy.” They say it is as simple as following 3 steps: contact your insurer and employer ASAP after you become totally or partially disabled, complete a claim form and then wait for your insurer to get in touch.

However, it is important to note that filling out a claim form isn’t always as easy as it sounds. There are often requirements for the policyholder to submit extensive documents relating to their income history, tax details and identification as well as GP statements and other reports. Should the policyholder have any difficulty locating or obtaining any of these documents, then their claims process could become complicated.

On the bright side, for those policyholders who have their affairs in order, are good at record keeping and have a genuine illness or injury prohibiting them from working, then getting approved for an income protection insurance claim shouldn’t be too difficult!

Do you pay tax on income protection pay?

As a successful claim will quite literally result in the policyholder receiving money which replaces their income, the pay from an income protection insurance policy is unfortunately taxable as regular income. Sometimes, the insurance company will withhold the amount of the tax owed and pay it to the government on behalf of the policyholder however, this isn’t always the case and once again highlights the importance of reading the PDS and being familiar with the conditions of any insurance policy you choose to purchase.

There is a silver lining to paying all this tax, though: premiums on an income protection insurance policy are tax deductible. This means that, while a policyholder is paying for income protection insurance without receiving a benefit, they will get a portion of their premiums back at tax time each year. The ATO provides more information about tax on income protection insurance policies on their website HERE4.

Do you pay less tax for having Income Protection Insurance?

In Australia, policyholders of income protection insurance, while still paying the same tax each week or month, will effectively end up paying less income tax each year due to income protection insurance premiums being tax deductible. This may come in the form of a higher tax return or less of a bill for those who still owe the ATO money at tax time.

income protection cover, tax
Typically, income protection insurance will replace up to 90% of your income (before tax) for the first portion of the policy, Following this, the benefit will usually reduce to approximately 70% of gross income.

How do you claim Income Protection Insurance?

Making a claim on income protection insurance in Australia, as discussed earlier, is quite a straightforward process despite the potential for heavy paperwork. It is, in most cases, as simple as calling or emailing your insurance provider to let them know you intend to make a claim as soon as you become totally or partially disabled.

From this point on, it’s simply a matter of filling out and providing the required forms and documentation to complete the claim. Following completion of all paperwork, policyholders need only wait for their insurer to contact them regarding the outcome of their claim.

How is income protection paid out?

Depending on the claim and insurance policy, income protection insurance will usually be paid out in one of two ways: a lump sum, or, as is most often the case, monthly payments intended to replace up to 85% of your income.

Can income protection come out of your super?

The majority of Australian superannuation providers do offer some form of permanent disability insurance (TPD) or life insurance, with many also offering income protection insurance. The premiums for these policies used to be automatically deducted until the Federal Government made reforms to the superannuation laws in 2019. If you think these are policies you could benefit from after doing your due diligence, be sure to get in touch with your super fund to make the appropriate arrangements.

However, it is important to note that there are some pitfalls with insurance policies provided by super funds, in particular, they often stipulate you must be unable to work in ANY capacity to be eligible for a payout. Should you injure yourself, for example, while working in construction, but the injury is of a nature that you are still capable of working in an administration job, you will not be eligible for a payout.

“By maintaining regular household income, income protection allows you and your family to keep up with your expenses, even if you aren’t working. This eases the financial pressure, so you can focus on getting back on your feet. Payment amount and length of cover will depend on your circumstances.”


How much does Income Protection Insurance cost?

Given the very wide range of salaries in Australia, the average cost of income protection premiums can also vary widely. However, a typical policy will cost you $60 a month for a monthly income of $4,000, with those earning $14,000 a month paying approximately $200 monthly.

How do you know how much income protection insurance you’ll need?

Because typical income protection policies will replace approximately 75% of your monthly income, it is a good idea to work out a personal budget before purchasing income protection insurance, allowing you to determine whether you need to accept a higher premium to receive a higher payout, or if you sit on the other end of the spectrum and could save money on premiums by covering less of your income due to having lower monthly living expenses.

There are many free expense calculating tools available on the internet to assist you in working out how much of your income you should cover. RACQ provides a comprehensive living expenses calculator on their website5.

income protection insurance cover
The majority of income protection insurers offer 2 year or 5 year policies, with some also offering policies until a predetermined age

Advantages of having Income Protection Insurance

Like all insurance policies, which exist to hedge against certain inherent life risks, purchasing income protection insurance has its upsides:

➢    Peace of mind provided to policyholders, who know that they’re covered should they become incapacitated and unable to work

➢    Premiums are tax deductible. For those who have higher incomes and therefore higher expenses, these tax deductions are a great way to offset larger premiums.

Disadvantages of having Income Protection Insurance

There aren’t actually many pitfalls when it comes to income protection insurance, however a couple come to mind:

➢    Adds to your weekly or monthly expenses

➢    Doesn’t provide a payout for 100% of your salary

➢    Some policies will not continue to pay you until retirement age

FAQs about Income Protection Insurance:

Many insurers share similar FAQs concerning income protection insurance. The most common include questions around what exactly is covered under the policy, if policyholders can increase their cover, differences between superannuation insurance policies and regular policies and also questions about terminology included in policy documents.

How long does income protection insurance last?

The majority of income protection insurers offer 2 year or 5 year policies, with some also offering policies until a predetermined age, for example the retirement age of 65. Be sure to speak with your insurer if you have any concerns about the length of your policy.

What is the maximum income protection benefit?

Typically, income protection insurance will replace up to 90% of your income (before tax) for the first portion of the policy, Following this, the benefit will usually reduce to approximately 70% of gross income. However, each policy is different and these figures could vary slightly between insurers and the needs of the policyholder.

Can you get Income protection insurance for a pre-existing condition?

The short answer to this question is yes, however, in reality matters are a lot more complicated. It all depends on the condition the policyholder has and its severity. Some conditions may be approved, however you should expect higher premiums and be sure to check the PDS carefully to ensure your condition is included. For particularly serious conditions, applications may be rejected altogether.

Summary – Is Income Protection Insurance worth it?

All in all, income protection insurance is a great way to achieve peace of mind, and ease the anxiety around some of the dangers of everyday working life, particularly for those in high-risk occupations and industries.

If you already have a particularly low income, are in good health and work in a low-risk industry, for example an office-based job, income protection may not be worth the added line on your expenses sheet. Every individual is different and therefore those seeking income protection insurance should consider how it will affect them personally, which should be a whole lot easier after reading this article!

Reference List:

  1. ‘Income protection insurance’, MoneySmart.gov. Accessed online at https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance on Jan 30, 2023.
  2. ‘What is Income Protection Insurance and how does it work?’, TAL. Accessed online at https://www.tal.com.au/income-protection-insurance on Jan 30, 2023.
  3. ‘How to claim income protection’, Gary Hunter, Finder. Published (updated) Oct 13, 2022. Accessed online at https://www.finder.com.au/income-protection-insurance-claims on Jan 30, 2023.
  4. ‘Income protection insurance’, ATO. Accessed online at https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/other-deductions/income-protection-insurance/ on Jan 30, 2023.
  5. ‘Living expenses calculator’, RACQ. Accessed online at https://www.racq.com.au/home/home-loans/living-expenses-calculator on Jan 30, 2023.
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