Income protection insurance

Income protection insurance is designed to pay part of your lost income if you're unable to work due to by illness or injury.

What is income protection insurance

If you're unable to work due to illness or injury, income protection insurance usually replaces a percentage of your pre-tax income (for example 75% or 90%) and bases the benefit on your annual earnings in the 12 months prior to your illness or injury.

Each income protection policy has its own definition of disability, and conditions that must be met before a claim is made.

Decide if you need income protection insurance

Income protection insurance can be important if you:

• don’t have a lot of paid leave that you can use if something happens
• rely on the income you earn to pay your bills

To work out how much income protection you need, do a budget. This will help you see your monthly expenses and the income you'll need to replace. You may want to factor in making payments to your super as well.

Also think about what other things could help replace your income. This could include:

• trauma insurance, that can help replace lost income
• any savings or investments you could sell
• what support from family or friends may be available

The gap between the amount you have and the amount you'll need can help you work out how much income protection cover to get.

If you need help deciding if you need income protection insurance and how much, speak to a financial adviser.

How to buy income protection insurance

You can apply for income protection:

• inside super through your super fund, or
• outside super directly from an insurer, broker or financial adviser.

Check if you already have income protection insurance through super. Most super funds offer default income protection insurance, and the cost of premiums is deducted from your super balance (which reduces your retirement savings over time).

Policies outside of super might allow a higher amount of cover and have more features and benefits available. You’ll have to pay the premiums out of your own pocket, but the cost is generally a tax deduction.

What insurers ask when you apply

Unless you’re getting default cover through your super fund, insurers will usually ask about your:

• age and job
• income
• medical history and family health history
• smoking and lifestyle
• high risk hobbies or sports

If an insurer doesn't ask for your medical history, it may mean that the policy has more exclusions or narrower policy definitions.

The information you provide will help the insurer to decide:

• if they should insure you
• how much your premiums will be
• terms and conditions for your policy

Answer honestly. If you leave out important details, the insurer may change or cancel your cover or refuse a claim.

To understand what's covered under a policy and the exclusions, read the product disclosure statement (PDS).

Important product features to check

The different features and exclusions in an insurance policy will affect the cost. Some important income protection features to check include:

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.

Benefit period – This is how long you’ll keep getting the monthly payments 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).

Type of premium - You can generally choose to pay for income protection insurance with either:

• variable age-stepped premiums — are based on your age and recalculated at each policy renewal.
• variable premiums — charge a higher premium at the start of the policy, but changes to the cost aren't based on your age, so increases generally happen more slowly over time.

Minimum work hours - Some policies might only cover you if you work a minimum number of hours (for example, 15 hours) per week.

Exclusions – Exclusions are things that the insurance policy doesn’t cover. For example, your policy might not cover illness or injury arising from self-inflicted injury, or something illegal that you’ve done. Or it might not cover active military service.

Questions to ask before buying income protection

Use this checklist when you compare life cover policies or speak with an insurer, broker or adviser. These questions help you spot gaps and hidden costs.

Income protection checklist

Questions to ask yourself

check_box How much of my income do I need to replace?

check_box How long could I manage without my usual income?

Questions for the insurer

check_box How much of my income will you pay and how do you work it out?

check_box What exclusions apply? Are there limits or exclusions for pre-existing conditions or risky activities?

check_box What is the waiting period and what is the benefit period?

check_box How will premiums change? Do they rise with my age or not? What other increases could happen each year?

Extra questions if the cover is through your super fund

check_box If the cover is in super, what rules apply to access it, and how will any payout be taxed?

check_box What happens if my super becomes inactive? Will cover end if I stop contributing or my super account balance runs out?

check_box What happens to the cover if I change jobs? Does changing employer change the income protection cover or conditions?

check_box Will I need medical checks to increase cover? What’s the process if I want more income protection cover than the default amount?

If you need to make a claim, see making an insurance claim for information on what to do. Any payment received under an income protection policy must be included in your tax return.