Income protection insurance pays you a regular monthly benefit (typically up to 70% of your pre-disability income) if you are unable to work due to illness or injury. Unlike a lump sum payout, it replaces your ongoing income for a defined period while you recover.

It is different from other types of personal insurance:

• Life insurance pays a lump sum to your beneficiaries if you die. It does not help you while you are alive and unable to work.
• Total and Permanent Disability (TPD) insurance pays a lump sum if you are permanently disabled and unlikely to ever work again. It does not cover temporary illness or injury.
• Income protection fills the gap between short-term sick leave and a permanent disability claim. It covers the months or years when you are too unwell to work but are expected to recover.

The risk of needing to claim on income protection increases significantly as you get older. According to APRA data, the most common causes of income protection claims in Australia are mental health conditions, musculoskeletal injuries (such as back and joint problems), and cancer. These conditions become more prevalent in your 50s and 60s.

The average duration of an income protection claim in Australia is around 1.7 years, but many claims last considerably longer. If you are earning $100,000 per year and lose your income for two years without cover, that is $200,000 you need to find from somewhere, likely your superannuation or your family home.

Where advice earns its keep

For workers approaching retirement, the stakes are particularly high. You have fewer working years left to rebuild your savings, and an unplanned gap in income can force you to draw down super earlier than planned, permanently reducing your retirement balance.

If you have ever wondered what would happen to your finances if an illness or injury stopped you from working, you are not alone. For Australians in their 40s, 50s, and 60s, especially those building towards retirement, losing your income even temporarily can derail years of careful planning.

Income protection insurance exists to address exactly this risk. It replaces a portion of your income if you cannot work due to illness or injury, giving you time to recover without draining your savings or super. This guide explains how it works, what it costs, and how to make sure you have the right cover in place.

Income protection policies have three key features that determine what you are covered for and how much you pay.

Benefit period: how long does it pay?

The benefit period is the maximum length of time the insurer will pay your monthly benefit for a single claim. Common options include two years, five years, or up to age 65 or 70. A longer benefit period provides more protection but comes with higher premiums.

Waiting period: when does it start?

The waiting period is how long you must be unable to work before the benefit payments begin. Common options are 30 days, 60 days, or 90 days. A longer waiting period reduces your premiums but means you need enough savings or sick leave to cover the gap.

Choosing a 90-day waiting period instead of 30 days can reduce premiums by 30% to 50%, so it is worth considering if you have an adequate emergency fund or employer-provided sick leave.

Agreed Value vs Indemnity Policies

This is an important distinction that many policyholders overlook:

Note that new agreed-value policies have not been available since 31 March 2020 following APRA intervention; the distinction now only matters if you hold an older policy written before that date.

• Agreed value: Your benefit amount is locked in when you take out the policy, based on your income at that time. Even if your income drops later, you receive the agreed amount. These policies are generally more expensive but provide certainty.
• Indemnity: Your benefit is calculated based on your income at the time you claim, typically your earnings in the 12 months before disability. If your income has decreased, your benefit will be lower than expected.

For self-employed Australians or those with variable income, this choice can significantly affect the value of a claim.

Where advice earns its keep

If you are in your early 50s with 15 years until retirement, a benefit period to age 65 may be worth the extra cost. If you are 60, a two-year benefit period may be sufficient and more affordable.

How your premiums are calculated over time is one of the most important decisions you will make when choosing a policy. Stepped premiums are recalculated each year based on your age, so they start lower but increase annually. Level premiums are based on the age you are when you take out the policy and stay relatively stable over time, though they may still adjust for inflation or insurer rate changes. The figure below shows how those two paths compare for a 40-year-old.

Where advice earns its keep

As a general guide, if you are under 45 and plan to hold cover for 15 years or more, level premiums often work out cheaper overall. If you are over 55 and only need cover for a few more years until retirement, stepped premiums may be more cost-effective since you will not hold the policy long enough for the annual increases to compound.

Many Australians hold income protection insurance inside their superannuation fund, often without realising it. There are advantages and disadvantages to both approaches.

Inside super:

• Premiums are paid from your super balance, so there is no impact on your take-home pay
• Premiums are paid from pre-tax (concessional) contributions, making it effectively tax-advantaged
• However, every dollar spent on premiums is a dollar not invested for your retirement
• Benefit periods inside super are often limited to two years under many funds’ default policy designs

Outside super:

• Premiums are generally tax deductible (see below)
• You have more flexibility to choose your benefit period, waiting period, and policy features
• Your super balance remains fully invested for retirement
• However, the premiums come directly from your cash flow

Where advice earns its keep

For many Australians approaching retirement, the erosion of super from ongoing insurance premiums is a real concern. If you have had default insurance inside super for 20 years, it is worth calculating how much that has cost your retirement balance in both premiums and lost investment returns.

Income protection premiums vary significantly depending on several factors:

• Age: Older applicants pay more, reflecting higher claim risk
• Occupation: A desk-based professional will pay less than a tradesperson or manual worker
• Health and medical history: Pre-existing conditions may lead to exclusions or higher premiums
• Benefit amount: A higher monthly benefit means higher premiums
• Benefit period and waiting period: Longer benefit periods and shorter waiting periods increase cost
• Smoker status: Smokers typically pay significantly more

As a rough guide, a 45-year-old office professional earning $100,000 per year might pay between $1,200 and $2,500 per year for income protection with a 90-day waiting period and a benefit period to age 65. However, premiums are highly individual, and the only way to get an accurate figure is to obtain a personalised quote based on your circumstances.

Yes, if you hold income protection insurance outside of super, the premiums are generally tax deductible under section 8-1 of the Income Tax Assessment Act 1997. This means the after-tax cost of your policy is lower than the headline premium. For someone in the 37% marginal tax bracket, a $2,000 annual premium effectively costs $1,260 after the tax deduction.

If your income protection is held inside super, the premiums are paid from your pre-tax (concessional) contributions. You do not claim a separate tax deduction, but you benefit from the contributions being taxed at only 15% rather than your marginal rate.

Where advice earns its keep

Any income protection benefits you receive when you claim are generally assessable income and must be included in your tax return, regardless of whether the policy is inside or outside super.

In our experience working with clients across south-east Queensland, these are the most common income protection mistakes we see:

Where advice earns its keep

Once you have a health condition, obtaining cover becomes more difficult and more expensive. Pre-existing condition exclusions are standard.