A beginner's guide to income protection insurance

What would happen if you lost your source of income today? According to a 2023 report, 52 per cent of renters and 28 per cent of homeowners (aged 25-34) have less than $1,000 in savings. This is just one reason why an income protection insurance policy could be an important consideration, creating a safety net to reduce financial stress if you unexpectedly lost your ability to earn an income. Along with consulting this income protection insurance guide, make sure you seek professional advice in order to make an informed decision that's right for your unique situation.

What is income protection insurance?

As the name suggests, income protection (IP) insurance is designed to alleviate the financial impact of losing your source of income. While it won't replace your salary dollar-for-dollar, income protection insurance pays a portion of your pre-tax income if you're unable to work due to injury or illness.

What does income protection insurance cover?

While each policy will have its own definitions and conditions, income protection insurance can pay up to 90% of your pre-tax income for a period of 6 months and pay up to 70% of your pre-tax income thereafter in monthly payments for a set period of time. Any payments will be reduced by other disability income you are entitled to claim such as sickness leave or workers compensation.

Usually, insurers will base these payments on the annual income you've been earning in the 12 months prior to encountering illness or injury. Income protection insurance policies aim to assist you to continue to cover your everyday expenses (like mortgage repayments, utilities and grocery bills) so you can focus on recovering and getting back to work.

What's included in an income protection insurance policy?

No two income protection insurance policies are the same, making it important to compare what's included in each policy and dive into each Product Disclosure Statement (PDS) to understand exactly what you're covered for.

Here are a few key things to consider when comparing income protection insurance policies:

  • Waiting period: Waiting periods are the length of time before your benefit payments begin after submitting a claim or from confirmation by a doctor of your disability. Generally, the longer the waiting period the less risk for the insurer, therefor the premium may be reduced compared to a policy with a shorter waiting period applied.
  • Benefit period: Benefit periods explain how long your monthly benefit will be paid as long as you remain unable to work due to illness or injury. Typically, the longer the benefit period the higher the risk for the insurer, therefor the premium may be more expensive than a policy with a short benefit period chosen. Income protection policies may offer a set benefit period such as two or five years, or up to a specific age (such as 65).
  • Premiums: Income protection insurance premiums can be structured in one of two ways:
      • Stepped premiums: These premiums will be recalculated at each renewal, typically increasing over time as the chance of you claiming on the policy rises.
      • Level premiums: These premiums may be charged at a higher rate (than a stepped premium policy) at the beginning of your policy but won't increase over time as you age.
  • Exclusions and restrictions: There are a range of reasons why your income benefit might not be payable (such as illness or injury caused by engaging in criminal activities, an intentional self-inflicted act and even pregnancy). Check your policy's PDS to see what exclusions might apply.

How do you secure income protection insurance in Australia?

You might already have income protection insurance, as some superannuation funds automatically provide a default amount of income protection. Check to see if you already have cover provided and whether it is enough to cover your potential costs. You may be able to increase the default amount to something more suitable for you.

If you're looking for a higher level of cover or increasing your level of cover and with specific features and benefits, it may be worth exploring income protection insurance outside of super, which you can secure:

  • Directly from an insurer
  • Through an insurance broker
  • Through a financial advisor

Is income protection insurance worth it?

Every one’s individual situation is different. It is however hard to put a price tag on peace of mind. Income protection insurance can offer valuable financial security for you and your loved ones.

Some of the benefits of taking out a policy include:

  • Financial support: With monthly benefit payments covering up to 70% of your pre-tax income, you can rest easy knowing your essential living expenses can be covered for a period of time.
  • Lower money stress: IP insurance offers the financial protection to support your family while you put your time and energy into your recovery and return to work plans.
  • Filling the cover gaps: While worker's compensation covers you for work-related injuries or illnesses, income protection insurance is focused on providing monthly payments for a set period of time when you can't earn an income due to illness or injury whether work related or not.

Keep reading: Looking at other types of insurance, such as life insurance? Explore our complete guide to comparing life insurance policies like a pro.

Quick facts about income protection insurance

Is income protection tax deductible?

In short, your premiums are generally tax deductible if you purchase a policy direct (and not through your superannuation fund). Keep in mind that you must also include any payment you receive under the policy for loss of your income in your tax return. The Australian Tax Office (ATO) explains that you may be able to claim your income protection insurance premiums against any income loss. Make sure to seek professional advice to understand the tax implications accurately.

How do you file an income protection insurance claim?

The first step to making an income protection claim is to contact the entity you bought your policy from (such as an insurer, broker, financial adviser, employer, or superannuation fund). Each company will have its own claims process, so make sure to have your policy number ready to get the process underway. Your insurer may also have details on their website about how to make a claim and what documentation is required.

How much does income protection insurance cost?

The best way to accurately understand the costs of income protection insurance is to compare your options. Choosi compares the features, benefits and premiums from a range of Australian brands assisting you to make a choice based around your needs.

Ultimately, income protection insurance is designed to help alleviate the financial strain of losing your source of income. With monthly benefit payments designed to support you financially when you're unable to work, income protection insurance can help ensure you don't have to worry about making ends meet while you're recovering from illness or injury.

Ready to weigh up your income protection insurance options? Compare online now or by calling us on 1300 363 526.


Choosi doesn’t compare all brands in the market. This information is general only; it doesn’t take into account your personal objectives, financial situation or needs and shouldn’t be relied upon as advice. You should consider the relevant Product Disclosure Statement (PDS) and Target Market Determination TMD) available on this website for more information and to ensure the product suits your needs. If you have legal, tax, or financial questions, you should consult an appropriate professional.