Your income is your biggest financial asset, yet many Australians protect their car, phone and house before insuring their salary. Income protection insurance is designed to replace a portion of your earnings if you can’t work due to illness or injury — but most people are unsure how it works, what it pays, or if it’s even worth buying.
This blog is answering 3 questions on income protection insurance:
- What does income protection insurance actually cover in Australia?
- How are the payouts calculated (with Australian examples)?
- Is it worth having, and who benefits most?
By the end, you’ll clearly understand how income protection fits into your financial safety plan — especially if you’re working, paying a mortgage, or supporting dependents.
Answering 3 Questions on Income Protection Insurance
✅ Question 1: What Is Income Protection Insurance and What Does It Cover in Australia?
Income protection insurance (also called salary continuance insurance) is designed to replace a percentage of your income if you’re temporarily unable to work because of illness or injury.
✅ What It Covers
Most Australian policies cover:
- Illnesses (e.g. cancer, chronic disease, mental health conditions)
- Accidents and physical injuries
- Long-term sickness preventing you from working
You receive monthly payments to cover bills, food, rent, mortgage, school fees, and other essential costs.
❌ What It Does NOT Cover
This is where many people get confused. Income protection insurance in Australia does not cover:
- Redundancy or being fired
- Business closure or loss of job due to economic reasons
- Taking a career break
- Pregnancy (unless complications prevent work)
- Very short-term sick leave that doesn’t exceed your waiting period
✅ Who Can Get It?
Income protection is typically available to:
- Full-time employees
- Part-time workers meeting minimum hours (often 20+ hours/week)
- Self-employed people and contractors
- Professionals, tradespeople, business owners
Many Australians also have cover through their superannuation fund, often by default, but the level of protection is usually low.
✅ Common Australian Insurers Offering Income Protection
- MLC Life Insurance
- TAL
- AIA
- ClearView
- BT
- Zurich
- AMP
- REST (via super)
- AustralianSuper (via super)
- Hostplus (via super)
Policies outside super typically offer better flexibility and higher benefits.
✅ Key Terms Australians Should Know
To truly understand your protection, here are important policy features explained in plain English:
🔹 1. Waiting Period (also called “deferred period”)
This is how long you must wait after becoming unable to work before payments begin.
Typical options:
- 14 days
- 30 days
- 60 days
- 90 days
- 6 months
- 2 years
Short waiting period = higher premiums.
Long waiting period = lower premiums.
Most Australians choose 30 or 60 days, depending on sick leave, savings or employer benefits.
🔹 2. Benefit Period
This is how long your insurer will keep paying you if you’re unable to return to work.
Common benefit periods in Australia:
- 2 years
- 5 years
- Until age 65 (most popular)
- Until age 70 (less common)
Longer benefit periods = higher premiums but better protection.
🔹 3. Benefit Amount
Australian policies usually cover up to 70% of your pre-tax income (used to be 75%, but changes were made by APRA in 2020).
🔹 4. Agreed Value vs Indemnity
Most modern Australian policies are indemnity value only (you prove your income at claim time).
Some older or grandfathered policies have agreed value (locked-in benefit regardless of later income drops).
✅ Question 2: How Are Income Protection Payouts Calculated? (Australia-Specific Examples)
In Australia, income protection benefits are usually calculated as a percentage of your pre-tax income, typically up to 70%.
Here’s how it works in practice.
✅ Example 1: Full-Time Employee in Sydney
- Annual salary: $100,000
- Monthly income: $8,333
- Policy covers: 70%
- Waiting period: 30 days
- Benefit period: 5 years
Payout:
70% of $8,333 = $5,833/month until you can return to work or for the duration of the benefit period.
✅ Example 2: Self-Employed Electrician in Melbourne
- Average annual income: $120,000
- Monthly income: $10,000
- Policy covers: 60% (due to risk rating)
- Waiting period: 60 days
- Benefit period: Until age 65
Payout:
60% of $10,000 = $6,000/month
Because self-employed Australians usually don’t get sick leave, a longer waiting period reduces premiums.
✅ Example 3: Teacher with Employer Sick Leave
- Salary: $85,000/year
- Monthly income: ~$7,083
- Policy covers: 70%
- Employer sick leave: 8 weeks
- Policy waiting period: 60 days
Payout:
70% of $7,083 = $4,958/month
Since the waiting period matches the sick leave, there’s no overlap — helping reduce premiums.
✅ Example 4: Couple with Mortgage and One Income
- Main earner salary: $95,000
- Monthly income: $7,916
- Policy coverage: 70%
- Waiting period: 30 days
- Mortgage repayment: $3,200/month
- Benefit period: Until age 65
Payout:
70% of $7,916 = $5,541/month
This covers mortgage plus living expenses while recovering.
✅ How Do Tax Rules Affect Benefits?
In Australia:
- Premiums paid outside super are generally tax deductible.
- Payouts are taxable (treated as income).
- Premiums inside super are usually not tax deductible (for individuals).
- Payouts from super-held policies are also taxable.
Example:
If you receive $6,000/month and your marginal tax rate is 32.5%, your after-tax benefit is around $4,050/month.
This is why many Australians calculate net payout, not gross.
✅ What About Centrelink or Workers’ Compensation?
Even if you’re covered by Centrelink or workers’ comp, these payments are often:
- Lower than income protection benefits
- Temporary or means-tested
- Harder to access unless certain conditions apply
Many Australians use income protection as the primary safety buffer, with government benefits as backups.
✅ Question 3: Is Income Protection Insurance Worth It in Australia?
For many Australians, the answer is yes — but only if designed correctly.
Here’s how to judge its value.
✅ When Income Protection Makes Sense
You should strongly consider it if:
✔ You rely on a regular income to pay rent/mortgage
✔ You have dependents (kids, partner, parents)
✔ You’re self-employed or a contractor
✔ You don’t have much in savings
✔ Your employer provides limited sick leave
✔ You’re paying off a business loan
✔ You’re over 30 and starting to build assets
❌ When It May Not Be Needed
It may be less urgent if:
✘ You’re retired or over 65
✘ You live off investments or passive income
✘ You have significant savings (12+ months’ expenses)
✘ You have income protection via super that meets your needs
✘ You rely on a partner’s income instead
✅ Cost vs Reward: Australian Perspective
Premiums vary based on age, income, smoking status, occupation, waiting period and benefit period.
Example: 35-year-old non-smoker, NSW
- Income: $90,000/year
- Wait: 30 days
- Benefit: 70%
- Benefit period: to age 65
- Premium: $75–$110/month (outside super)
Premiums are tax deductible if paid personally, reducing net cost further.
✅ Common Australian Myths About Income Protection
❌ “I’ll just rely on my savings.”
Most Australians have under 3 months’ emergency funds. A long-term illness can wipe out savings quickly.
❌ “My super already covers it.”
Most super-linked insurance only pays 1–2 years of benefits and may not match your salary.
❌ “Workers’ comp will protect me.”
Workers compensation only applies if your illness/injury is work-related — most claims aren’t.
❌ “I’m young and healthy — I don’t need it.”
Over 50% of income protection claims in Australia are from people aged under 45.
✅ How to Choose the Right Policy in Australia
Here’s what to check before buying or adjusting your income protection:
🔹 1. Confirm insured income level
Does it match your real earnings?
🔹 2. Check waiting period flexibility
Can you afford to wait 30, 60 or 90 days?
🔹 3. Decide benefit duration
Short-term cover (2 years) or until 65?
🔹 4. Look at inside vs outside super
Outside super = more control and features
Inside super = automatic coverage but limited
🔹 5. Read exclusions carefully
Look for mental health, pregnancy, back injury, and pre-existing condition limits.
🔹 6. Consider indexation
Will your benefit increase with inflation?
✅ Quick Comparison: Inside vs Outside Super
| Feature | Held in Super | Purchased Personally |
| Tax Deduction | No (for you) | Yes |
| Flexibility | Limited | High |
| Waiting Period | Often fixed | Choice |
| Benefit Period | Usually 2 yrs | Up to age 65/70 |
| Payout Tax | Yes | Yes |
| Premium Payment | Auto (from super) | You pay directly |
| Underwriting | Simple | More thorough |
✅ How Much Cover Do Australians Usually Need?
A simple formula many financial advisers use:
Monthly benefit = (Total monthly expenses) ÷ 0.7
Example:
- Mortgage: $2,600
- Groceries: $900
- Utilities: $450
- Insurance, fuel, transport: $650
- School/childcare: $800
- Miscellaneous: $700
Total expenses: $6,100/month
To replace that at 70% cover:
$6,100 ÷ 0.7 = $8,714/month of insured income
So you’d insure an annual salary of around $104,500.
Also Read: Life Insurance Investment: A Complete Guide for Australians
✅ Final Thoughts: Should Australians Prioritise Income Protection?
If you earn an income, have dependants, pay off a mortgage, or don’t have a full year’s savings — income protection can be a financial lifesaver.
It ensures you don’t burn through savings, rely on credit cards, default on loans or depend on Centrelink.
✅ Best Next Steps for Australians:
- Check if you already have cover via super (and how much it pays)
- Calculate how long you could survive without income
- Decide your ideal waiting and benefit periods
- Get at least two quotes from insurers or a broker
- Work out after-tax benefit vs cost
- Review exclusions, indexation and expiry age
