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What is Income Protection and How Does it Work?


For those of us who have a limited understanding of income protection insurance, there are many questions that need to be asked and answered. Some of the questions that will cross your minds are-

  • What is the main purpose of income protection insurance?
  • What does it cover?
  • Who does it cover and will you require it?
  • What is the premium for it and factors you should consider to keep it in check?

It’s only natural to have so many questions running at the back of your mind. After all, income is an important aspect of your life and you need to find the right policy to cover your needs.

So, here is a small guide to answer most of the important questions related to Income Protection Insurance and its benefits. As you move ahead, this article will explain how the entire process works and why it’s an investment you should absolutely make.

What is Income Protection Insurance?

Imagine this. You are the only person in your family who puts the food on the table, and are earning good wages to provide your family with everything necessary for everyday life and more, since the finances are running smoothly. However, one fine day you fall ill and are unable to attend work for an extended period. Your income stops coming in and your finances are in chaos. There are bills, fees, and food to pay for. Add in the cost of your medical expenses and it’s a mountain of debt piling up in front of your eyes. You might have some savings but that too might run out soon. Suddenly your standard of living might be at risk. What can you do when this happens?

Now, isn’t that a fearful thought?

Having a steady source of income offers us peace of mind. But, tragedy can befall anyone at anytime and that too without any warning signs. Hence, you need to remain prepared for adequate financial coverage other than your savings. This is where income protection comes in. Income Protection cover can offer you up to 75% of your income, on a monthly regular basis, in cases where you are unable to attend work due to serious illness, injury, or an accident. During the fiscal year of 2015-16, it was reported that there were around 10700 claims for serious injury and disease by Australian workers, which led to 77% of the direct and indirect costs. That is an alarming number and all the more stresses on the need for an income cover.

What is covered under Income Protection Insurance

Income Protection Insurance is typically calculated on the basis of your average earnings during the previous 12 months before you make a claim. The insurance can provide you a cover of upto 75% out of your monthly income giving you maximum monthly benefits as a result. You can choose from three types of Income protection policies for a cover as listed below.

  • Agreed Value: This policy helps you in preventing loss by giving you fixed income benefits, valued at what you had been earning when you took the policy.
  • Guaranteed Agreed Value: This policy functions similar to the Agreed Value policy, however insurers will require filing information regarding your income.
  • Indemnity Value: The policy covers you income benefit, valued at what your earnings are when you make a claim.

In case you feel that you need complete coverage, you may also choose to pair-up your income protection with other insurance policies that can cover you for loss of income. Some of the policies that you may opt for are as follows:

  • Life Cover or Term Life Insurance Policy: This covers you or your beneficiaries, in lump-sum, in case you suffer from any type of terminal illness or inopportune death.
  • Trauma Insurance: Again this is a lump sum amount that you benefit from in case of any serious illness or injury.
  • Total Permanent Disability: The policy covers you if you happen to become permanently disabled due to any mishap. It is usually paired along with your life insurance coverage.

Before you go ahead and pick an insurance policy, ensure to check all the terms and conditions with a keen eye so that you know whether it meets all your requirements. You must be sure of the conditions for which you can claim for as well as the amount you are likely to get when you make a claim.

Factors to Consider Before taking Income Protection Insurance

Just as any other insurance there are certain factors to keep in mind before applying for an Income Protection Cover. These factors will determine how much cover you will receive as well as the premiums that you are going to pay. Here is a list of things that you should consider.

  • Age: Age might just be a number, but an important factor when taking insurance. The older you are when applying for insurance, the higher your premium will be as you have more risks of falling ill or getting injured.
  • Gender: Premiums, in this case, is higher for women as they are more likely to take time off work especially during pregnancy and also because they are seen to be at a higher risk of health risks and complications during childbirth.
  • Existing health conditions: If at present, you are undergoing treatment for any illness or have sustained injury your premiums will be high and there will be an added timeframe before you can claim for Income Protection Insurance.
  • Previous medical conditions: Do you have a history of any type of medical condition? If yes, then your premiums will be higher as you pose an increased risk of a relapse.
  • Occupation: Someone with a risk-related job profile like a miner or skydiving instructor will have higher premiums than someone with a sedentary job like a banker. The reason being that high-risk jobs pose greater chances of injuries or even untimely death.
  • Lifestyle: What type of a lifestyle do you follow? Are you an adventurous person or someone who likes to live the slow life? The more exposure you have to risks due to your lifestyle the greater your premiums will be.
  • Smoking: smoking is injurious to health and your premiums as well. Since your health is already at risk due to this habit, premiums are bound to soar. However, if you have quit smoking for at least 12 months and then apply for Income Protection, you will be considered a non-smoker and get a cut on your premiums.

Additionally, keep your insurer in the loop about any type of information that might be important for making the claim. Do not try hiding information from your insurer as they will find out and this may lead them to decline of your application due to the discrepancies found. You must also know that the longer you wait to make a claim your premium rates will fall too.


Your income protection cover must be able to meet your requirements after you die or in cases of serious injury or disability. So, before you make the plunge, analyze whether the amount you are investing for is sufficient for protecting you and your family from any sudden mishap.

Most Australians are hesitant to spend money on Income protection and stack the thought behind their minds. However, it should be understood that even if the thought is scary, the investment is worth it. Imagine not having to worry about anything that your family or you require in spite of being out of work. Wouldn’t it be nice to have everything taken care of even in your absence? So, if you have not thought about it and applied for one, it’s time to do and live without any worries. Mishaps can happen anytime and it’s always best to stay armed and prepared.