In Australia, income protection covers you for a portion of your income (e.g. 70%) if you can’t work due to a serious injury or illness. When you make a claim, you’ll receive your income protection benefit in the form of monthly payments for a set amount of time known as your benefit period (e.g. six months or until you turn 60).
Income protection could be a good product to consider if you’re a small business owner, self-employed or in any other role that doesn’t offer sick leave, workers’ compensation or any other entitlement that could support you and your loved ones if you’re unable to work for a period of time due to illness or injury. However, income protection isn’t only for the self-employed. Anyone who doesn’t think they’d be able to support themselves if they couldn’t work for a period of time due to illness or injury can benefit from an income protection policy.
The exact percentage of your income and the benefit period you’ll be covered for will depend on your income protection policy and your insurer, so it’s worth shopping around and comparing policies to find the right level of cover for you.
The income protection claim process
To get your claim started the first thing to do is let your insurer know that you need to make a claim. For your income protection insurance claim, you will provide the relevant evidence of a serious injury or illness and provide proof of your pre-disability income. The following documents may also be required by the insurer:
- A filled-out claim form
- Income statements
- Medical reports and/or hospital discharge forms
- Proof of identity (e.g. birth certificates, passports)
- Income tax notice of assessment
- Treating doctor’s statement.
Your insurer may also contact your employer or other parties to confirm the evidence you provide and establish what your regular duties are.
How are your income protection payments calculated?
How your income protection benefit payments are calculated will differ between insurers. For instance, with an indemnity value policy, they will generally take an average of your income over the past 12 months and pay a set percentage of that average based on your level of cover and personal circumstances.
Typically, income protection insurance covers up to 70% of your pre-disability income plus a 10.5% contribution to your superannuation fund. Some insurers will cover a higher percentage at the start of your benefit period and reduce it throughout (e.g. 80% for the first six months and 50% for the last six)
The amount you’ll be paid each month may also be affected by workers’ compensation payments, Centrelink benefits and other sources of income you could gain access to during this period. You may also be paid less if you have a partial disability and are still able to work part-time, as opposed to having a total disability.
If you took out income protection before 31 March 2020, you could potentially be on an agreed value policy, which are no longer offered by Australian insurers. On an agreed value policy, you and your insurer agree on your monthly benefit amount when you first take out cover. In exchange for this guaranteed income protection payout, you’ll typically pay a higher premium on these policies.
When will I be paid?
Subject to the terms of your policy, you’ll have to serve a waiting period and remain totally or partially disabled while serving it, and be unable to work before you may be eligible to claim; these waiting periods can vary from days to months, or even years. Your first payment is generally paid one month following the completion of this period in arrears. If you want to continue receiving this payment, you may need to provide ongoing proof of your inability to work due to illness or injury to meet your insurer’s eligibility requirements.
Proving your condition may require you to fill out and submit several forms monthly. Need more information? Learn a little about the process of getting income protection.
How does income protection work with tax?
If you have an income protection policy through an insurer, you may be able to claim your premiums on your tax return. However, if you take out your policy through your super fund, you won’t be able to claim your premiums as they’re taken from your super contributions.
This is not the case for other types of insurance that make a lump sum payment to compensate you for injury. This includes term life, trauma and total and permanent disability (TPD) insurance policies, which are not tax deductible.
According to the Australian Taxation Office (ATO), you will also have to pay tax on your income protection payments as a form of income.1 Keep this in mind when it comes time to file your next tax return.
Looking to get the best income protection payout for your money?
Finding the policy that will provide you with the best value for money will depend on your personal circumstances and insurance needs. However, it can never hurt to compare. With our free income protection comparison tool, you can compare policies from some of Australia’s biggest and most trusted insurers and see their benefits and costs side-by-side to help you choose the right cover option for you.
The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it’s important to read the relevant Product Disclosure Statement (PDS.)