Best Income Protection Insurance

Mitch Ramsbotham

Financial Expert Updated on June 20, 2023

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Do you want to secure financial support while recovering from an injury or illness? What is the best Income Protection (IP) Insurance for your individual circumstances?

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According to the Australian Bureau of Statistics (ABS), from 2017 to 2018, 61% of Australians required time off work due to occupational injuries or illnesses. 

With such a large number of Australians suffering from illness or injury, it is important to consider the financial ramifications a loss of income would mean for you and your family, and the benefits that income protection insurance could therefore provide.  

This article provides the crucial information needed to find the best income protection cover. We discuss what income protection insurance is, the features of good income protection insurance policies, and the cost of income protection.

It also provides answers to key questions that should be reviewed, such as:

  • Do you have sufficient financial assistance to cover expenses and debts until you return to work following a disability?
  • How much income protection insurance cover is appropriate for you?
  • Is the best IP policy always the cheapest? 

This comprehensive financial guide also includes details of the best income protection policies for redundancy, self-employed Australians, and doctors. It also details how to buy IP insurance, what to tell your insurer, and whether income protection insurance policies are worthwhile. 

What Is Income Protection Insurance?

Income protection insurance (IP) is a valuable life insurance product whereby a portion of your lost income is paid directly to you, by the insurer, in circumstances where you are rendered incapable of working due to an injury or illness. 

With IP insurance assisting you to cover bills and debts, you can direct your focus towards recovery and getting back to work. 

Consider the following scenario. You cannot work due to partial or total disability. In Australia, an income protection cover pays a maximum of 85% of your pre-tax income. 

This type of insurance is designed to replace your annual income. The benefit is usually based on your earnings 12 months before your injury or illness. 

You must meet the policy’s specific requirements before making an income protection claim. These are typically found in an insurer’s website or the relevant Product Disclosure Statement (PDS). The PDS will also include the policy’s applicable exclusions, such as pre-existing medical conditions. The PDS provides all the relevant information a potential policyholder needs to determine if they want to purchase an insurance policy. 

Before purchasing IP insurance, it’s critical to learn other essential definitions that are relevant to the policy. Examples include “sum insured”, being the fixed amount an insurer guarantees a policyholder or their family if an insured event occurs. In return, you pay insurance premiums on a monthly basis. 

Insured events are incidents that result in damages, injuries, or losses. These circumstances are covered by an individual’s insurance policy.

Aside from IP, other practical insurance policies include:  

  • Live Cover: Pays a lump sum if you pass away.
  • Trauma insurance/Critical Illness Insurance: Covers you if you’re diagnosed with a severe illness.    
  • Total and Permanent Disability Insurance (TPD insurance): Pays a portion of your income if you’re unable to work due to a permanent illness or injury. 

What Are Features of a Good Income Protection Insurance?

There are several features that make an income protection policy “good” or good value including:
  • Provide the maximum cover amount required to maintain your current lifestyle
  • Cover you for the indicated length of time (benefit period) you want
  • Offer affordable premiums
  • Waive premiums if involuntarily unemployed while the claim is being paid or the policyholder is on parental or sabbatical (paid leave for a regular job) leave 
  • Include built-in benefits and extra features that can be individually tailored to suit the needs of the insured.
  • Provide a short waiting period (the period of time you must wait before you can claim some or all benefits of an insurance policy
  • A partial disability benefit: this covers you if you return to work but at a reduced capacity due to your illness or injury.

How Much Does Income Protection Cost?

Income protection insurance premiums are a policyholder’s yearly or monthly payments required to maintain the policy’s cover. 

The amount you will pay for premiums differs depending on how much your income protection insurance pays out in the vent you need to make a claim.

Income protection cover premiums can vary significantly because they are usually calculated based on the following policyholder’s details:

  • Age
  • Gender
  • Income
  • Occupation
  • Smoking status

A company providing insurance cover determines such variables. It is therefore advantageous to compare income protection quotes before deciding which IP policy to buy. Consider comparing at least three policies to find a policy that is most compatible with your needs and budget.

Some income protection insurance providers – like TAL and Zurich – feature comparison tools on their websites for a side-by-side differentiation of the policies they offer.  These can also help you decide how much cover you need.

Before purchasing an income protection policy, some of the key variables to factor into your research include:

  • Maximum monthly benefit
  • Duration of the benefit payment
  • Waiting period 
  • Ease of the application process
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Choosing the Best and Cheapest Income Protection

There are 7 essential steps to follow, which will assist you to determine whether an IP provider’s cover meets your requirements and budget.
Step 1: Pick an income protection policy type.

This selection will affect your policy’s cost and the monthly benefit you can expect to receive. Here are some of the most frequent policy types: 

Agreed Value: These premiums are calculated based on your income when applying, offering more assurance to potential policyholders. 

Agreed value policies are ideal for people with fluctuating incomes, including those who are self-employed and small business owners.

Indemnity Value: Indemnity value policies generally offer cheaper premiums compared to others. The benefit paid is based on the proof of income supplied at the claim time. So if you get a pay cut during this period, your policy’s benefit amount also decreases.

Indemnity value is recommended for those with stable incomes. 

Guaranteed Agreed Value: With this policy type, an insurance company guarantees your monthly benefit after approving your income during the application process. 

Step 2: Calculate your monthly benefit or the benefit amount.

Determine how much financial support you would need to secure in the event you lose your working income.

Note: some companies provide the option to increase your monthly benefit. 

Step 3: Determine the benefit period or your expectations of the duration of the financial benefit 

Learn the maximum length of time an insurer will pay out your monthly benefit. A longer benefit period typically leads to increased premium costs. When deciding on the benefit period, it is important to take these additional factors into account:

  • Your retirement age
  • How dangerous your occupation and lifestyle are
  • How long you and your dependents can maintain your current lifestyle without an income
  • The likelihood you’ll return to work after becoming severely sick or injured
Step 4: Determine the waiting period

This timeframe, also referred to as a waiting period, is the time when you will be off work due to your illness but will have to wait until the IP coverage starts. Insurers give policyholders options, usually ranging from 14 days to two years. 

If you want a shorter waiting period, you should be prepared to pay more expensive premiums.

Step 5: Pick a premium structure.

There are 3 primary income protection premiums to select from:

Level Premiums: These are typically more expensive than stepped premiums at the start. However, they don’t increase each year as they’re not age-based. 

Stepped Premiums: These usually begin cheaper than level premiums, then increase each year while the cover remains unchanged. As a result, stepped premiums can become quite expensive as you age.

Optimum or Hybrid Premiums: Policyholders start with an above-average stepped premium structure which increases yearly. However, after reaching a pre-determined price, these premiums are converted to level premiums. 

Step 6: Determine a policy’s built-in benefits.

The best-value income protection insurance typically includes a list of built-in benefits that add to the policy’s overall quality. Such features can include:

  • Specific injury benefit
  • Rehabilitation and accommodation benefit
  • Premium waiver benefit
  • Suspending of cover benefit

Some insurers provide the option to pay an extra fee to add additional features, including:

  • Day 1 accident benefit: If you’re involved in an accident, the insurer will back-pay to day 1 of your claim.
  • Lump-sum benefit: The insurer makes a single, large (lump sum) payment rather than instalments. 
  • Increasing claims benefit: An insurer increases the total or partial disability benefits each year to account for inflation. 
Step 7: Be sure to compare income protection policies and quotes

It’s important to understand what income protection insurance covers are going to be most effective for you but also be most beneficial in the event you need to make a claim.

You can obtain quotes directly through Australia’s leading insurance companies, through online calculators, or through an Insurance Specialist who can provide personalised advice.

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Is There a “Best” Income Protection Policy?

As is the case with other life insurance policies, there is no “one size fits all” income protection policy in existence in Australia. Various similar products offer multiple compensation levels, subject to different terms and conditions (T&Cs).  

Several factors determine whether certain income protection policies are right for you, so, it is always suggested that you should compare policies and shop around.  

What’s the Best Income Protection for Redundancy?

Redundancy is another situation that needs to be considered when searching for the best income protection insurance policy. Some policies include coverage if you’re subject to an “involuntary redundancy,” which occurs when a company reduces their workforce due to a position not being required. 

An involuntary redundancy differs from voluntary redundancy, in which workers can decide whether or not to continue working.

Income Protection Policies involving redundancies may have varying requirements. Some insurers state that you can’t volunteer for a redundancy package or you cannot have been terminated for misconduct. 

Always read a policy’s T&Cs and understand the financial product’s inclusions and exclusions. 

What is the Top Income Protection for the Self-Employed?

Self-employed Australians typically don’t have fixed salaries. Hence, an agreed-value policy can be a flexible option that may provide maximum financial support. An approach that’s becoming more popular involves policies with a 3-tier disability definition.
  1. Duties-based: You are unable to perform the income-producing duties vital to your occupation.
  2. Hours-based: You are working in a reduced capacity (less than 10 hours per week) due to injury or illness. 
  3. Income-based: You are not working or earning an income due to injury or illness. 

The Best Income Protection for Doctors

When selecting income protection policies for doctors, the choice should consider how an insurer defines a claimable event. 

Generally, doctors have quite high salaries so some doctors may be able to afford choosing a lower policy and live off a significantly reduced salary. Other individuals may want to pay the higher premiums to secure the maximum benefit available to them.

Additionally, some insurers allow people to select which of the 3-tier definitions (duties-, hours-, or income-based) is most suitable to their particular financial situation which may be relevant to you as a doctor. 

How to Buy Income Protection Insurance

Before purchasing a new income protection insurance policy, it is important to ascertain if you already have income protection cover through your superannuation (super fund). Super funds usually provide default income protection insurance at a lower cost than when the policy is purchased directly from an insurer. 

If necessary, you can ask your super fund to increase your level of cover. 

You can also purchase income protection insurance from: 

  • An insurance company’s authorised representative 
  • A financial adviser
  • An insurance broker

Financial advisers can review and explain documents like a Target Market Determination (TMD). 

TMDs feature for whom financial products, such as insurance policies, may be suitable. 

Financial advisers can also provide life insurance guidance and personal financial information.

When selecting a financial adviser, ensure that they have an Australian Financial Services License (AFSL). Financial services companies should also be certified by the Australian Securities & Investments Commission (ASIC). 

All ASIC-certified companies receive an Australian Business Number (ABN), which makes it easier to monitor business transactions.  

When purchasing IP insurance outside a super fund, the premiums are generally tax-deductible. This feature is critical when filing tax returns and is definitely something to factor into your budget in terms of premium costs. 

Non-super fund IP policies generally provide a level higher coverage, which is crucial when considering how much income protection insurance you need. 

These non-super fund income protection products may also have more benefits and features available. 

What Information You Need to Tell Your Insurer

You should share all relevant details that could affect an insurer’s decision to provide cover to you. When you apply, renew, or change your IP policy, you should provide the following information:
  • Age
  • Medical history 
  • Occupation 
  • Income (wage, salary, and commissions)
  • Lifestyle (for example, are you a smoker or a non-smoker?) 
  • High-risk hobbies or activities (do you engage in such activities, like skydiving?)

With this information, the insurer can determine the following:

  • If you should be insured
  • How much life insurance you need for your personal circumstances
  • The cost of premiums 
  • The T&C’s applicable to the policy

It’s critical to answer all questions honestly because non-disclosure and misleading answers are grounds for an insurer to deny any claim. 

Is Income Protection Worth It?

Your income is one of your most significant assets as it allows you to support yourself and your loved ones while saving for retirement. 

A disability-caused loss of earnings can have a drastic effect on your life. Income protection cover is essential when you begin working if you want maximum financial security. It offers financial protection by providing for future living expenses. 

Generally, IP insurance is worthwhile if you:

  • Own a business or are self-employed. You may not have employee benefits, such as sick pay or annual leave. 
  • Have many ongoing payments (for example, a mortgage or car loan) but little savings.
  • Support a family. 

Experiencing an injury or illness that requires you to miss work and fall behind on loans and bills can be devastating for you and your loved ones.

Prepare for an unexpected break from work by finding the best income protection insurance.

Still not sure where to start, or want help securing the right insurance faster? 

That’s okay!

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You can reach out to My Money Sorted to guide you for free before you seek professional advice from an insurance expert!

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1. Income protection insurance 


2. How life insurance works


3. Disclosure 


4. Disclaimer 


5. Waiting period


6. Indemnity


7. Lump sum


8. Target market 


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