Income protection insurance: the lowdown

What would you do if you could no longer work?


Income protection insurance covers you financially if you are unable to work temporarily due to illness or injury. Generally, policies will cover up to 75% of your pre- tax income, for the period that you are off work (the benefit period which is typically 2 years, 5 years, or up to age 65). This is set at the time you buy the policy. The benefit will be paid to you by the insurer until you are able to return to work or for the entire benefit period.

For anyone who is working, income protection is something worth considering.

What type of income protection?

While insurers may offer any number of unique products and policies, there are two main types of income protection insurance: agreed value policies and indemnity value policies. The type of policy you choose will depend on your personal and professional circumstances.

Agreed Value policies

Agreed value policies mean the amount you are covered for is agreed on at the time you take out the policy, up to 75% of your earnings at that time. So even if your salary has changed or varied a lot from year to year, if you make a claim, your benefit will be paid at the agreed amount. Because of the certainty they provide, agreed value policies typically have higher premiums, so you may have to pay more up front.

Indemnity value policies

Indemnity value policies cover you for up to 75% of  your income at the time you make a claim, so you need to be able to show your current income when you claim. This type of policy works well for people with regular incomes that can easily produce a pay slip showing their current salary. These policies also have lower premiums than agreed value polices.

What else?

Income protection is there to provide an income in case you are unable to work. When comparing policies, think about how much cover you will need to be able to meet your ongoing expenses, like mortgages, debts and day-to-day living costs.

It is important to understand that most Income Protection policies available in Australia do NOT provide any cover if you lose your job or your job is made redundant.

As with all types of insurance, it is important to read and understand the terms of the policy as the definitions, exclusions and benefits will nearly always vary. Make sure understand what you are getting when you take out the cover.