What income protection insurance does
Income protection insurance replaces part of your income when illness or injury stops you working. It is the policy that keeps the mortgage paid and the bills met while you recover, rather than forcing you to draw down savings or sell an asset under pressure. Most policies pay up to about 70% of your pre-tax income for a defined period if you are unable to work due to partial or total disability.
The detail that matters sits in the definitions. Every policy carries its own test of "partial or total disability" that must be met before a claim is paid, and those tests differ between insurers. The Product Disclosure Statement (PDS) is where that test is written down, so it is worth reading carefully — or having your adviser read with you — before you commit to a particular policy. This page is general information about how the cover is built; whether a specific policy suits you is a question for your licensed financial adviser.
How a policy is structured
Income protection is assembled from a few moving parts, and the combination you choose drives both the premium and how the cover behaves when you need it.
- Indemnity value. The benefit is a percentage of your salary at the time you claim. If your income has fallen since you took the policy out, the monthly payment falls with it. Indemnity policies are generally cheaper and tend to suit people with stable, predictable income.
- Agreed value. The benefit is a percentage of an amount agreed when you sign up, fixed regardless of later income movements. These cost more, but can suit income that varies year to year — the self-employed, for instance. Availability of agreed-value cover has narrowed in recent years, so confirm what is on offer.
Waiting period. This is the gap between becoming unable to work and the first payment, and it ranges from around two weeks to two years. A longer wait lowers the premium; a shorter wait costs more. The right setting depends on how long you could fund yourself from savings, sick leave or other cover before the policy needs to step in.
Benefit period. This is how long payments continue once they start — commonly two to five years, or through to a set age such as 65 or 70. A longer benefit period costs more but protects you against a prolonged inability to work, which is the scenario most likely to do real financial damage.
Stepped or level premiums
How you pay also shapes the long-run cost.
- Stepped premiums are recalculated at each renewal and usually rise each year as the likelihood of a claim increases with age. This is the most common structure and the cheapest in the early years.
- Level premiums charge more at the outset, but the cost is not driven by your age, so it rises more slowly over the life of the policy.
The trade-off is straightforward in shape, even if the right answer is personal: pay less now and accept rising costs later, or pay more now for steadier pricing over time. Which one fits depends on how long you expect to hold the cover and how your budget is likely to move — a question to work through with your adviser.
Choosing the level of cover
Income protection is one piece of a broader financial plan, and the cover should be sized against the rest of it. Before settling on an amount, it helps to be clear on a few things:
- How quickly you would need a payment to start.
- What financial obligations you carry now, and expect to carry, that the cover needs to support.
- Whether existing medical conditions or family history could affect a future claim.
- Whether you already hold life or total-and-permanent-disability cover that overlaps or fills gaps.
- How long you might need to rely on the payments.
Premiums for income protection held outside super are often tax deductible, which can change the real cost of cover meaningfully. Confirm your position with your accountant rather than assuming it applies.
Inside super or outside it
Income protection can be held through a super fund or as a standalone policy, and each route carries trade-offs.
Cover inside super is often cheaper, because funds buy in bulk, and premiums come out of your super balance automatically rather than your cash flow. Many funds grant a default level of cover without a medical, which can help if your occupation or health makes cover hard to obtain elsewhere. The cost is that the balance funding your retirement is quietly eroded over time, default cover is generic, and pre-existing or known conditions are frequently excluded. Cover also depends on the policy staying active — if the fund goes dormant or contributions stop, the cover can lapse.
Standalone cover outside super is generally more tailored: you can shape the definitions, waiting period and benefit period to your circumstances rather than accepting a fund's default. It typically costs more and is paid from your own cash flow, but it does not draw down your retirement savings. Which path serves you better is exactly the kind of question to put to your licensed financial adviser and accountant, who can weigh it against your super strategy and tax position.
Where this connects to lending is structure. Replacing income during a setback is what protects a property plan from being unwound at the worst possible time, and the way your borrowing is built — buffers, repayment type, which loans sit where — should account for how you would carry it if your income paused. That structural question is where we can help, even though the insurance itself is your adviser's remit.
Book a strategy session and we will work through how your borrowing should be structured around the income you are protecting.
General information only — not personal financial product or credit advice, and not a recommendation to acquire or vary any insurance. Whether a particular policy suits you is a matter for your licensed financial adviser and accountant. AeFin is an Australian Credit Representative (CR 464548) of Finsure (ACL 384704).