How does income protection work?

You probably know you can get insurance to cover your income if illness or injury prevents you from working, but if you’re not clear on how these policies work, you’re in the right place. Here’s what you need to know.

The purpose of income protection insurance to help cover a percentage of your income in the unfortunate event you're unable to work due to an illness or injury.  

So how does income protection insurance work? We’ve answered a handful of commonly asked questions to help you get your head around it.

Do I need income protection insurance?

Income protection insurance can help provide peace of mind if you're someone who earns a wage or salary, and you know you'd struggle to pay the bills if you couldn’t work as usual for a period of time. Some circumstances can make income protection insurance particularly important to consider, such as:

  • Sole traders without access to sick leave or annual leave, who might decide having income protection insurance is a priority.
  • If you have debt, such as a mortgage, or rent that needs to be paid, even if you lose your income.
  • If you have dependants who rely on your income.

There are a number of other factors to consider too, to help you decide whether you need to consider income protection insurance.

How much income protection do I need?

The maximum amount of income protection insurance you can take out varies, but for Medibank Income Protection, you can cover yourself for up to 70% of your monthly pre-tax income (up to $12,500 per month, depending on your age).1

To help you identify what level of cover you need, it’s useful to create a budget to determine your expenses and how much of your income you’d realistically need an insurance policy to replace.

It’s worth noting that since March 2020, income protection insurance policies are considered solely indemnity value policies. This means the amount you’re insured for is a percentage of the income you’re earning when you make a claim, rather than your income when you took out the policy. This can be important to remember if your income varies quite a bit from year to year.

Speak to a financial adviser for help deciding how much income protection would be right for you.

How much is income protection insurance?

The cost of income protection insurance is influenced by a number of factors such as age, occupation, gender, income and your health and lifestyle.

In addition to how much cover you’d like or need, there are two other decisions you need to make:

  • The waiting period before insurance benefit payments are made following a claim.
  • How long you’d like payments to continue if and when you make a claim.

The waiting period options vary between insurers and policies, but common time frames are between 30 and 90 days. Shorter waiting periods usually cost more so it’s worth considering how much sick and annual leave you have available. Factoring in leave allowances may mean you can choose a longer waiting period. Keep in mind that in order to be eligible for monthly benefit payments, you must be disabled and unable to work and you must meet all the policy terms and conditions.

Benefit periods also differ – common options are two years and five years. The longer the benefit period, the more expensive the premiums usually are. Bear in mind though that all income protection policies have a maximum benefit period regardless of whether you’re able to return to work or not. It’s therefore important you read the PDS to understand the policy you’re buying.

Is income protection tax deductible?

Yes – for most taxpayers, the premiums you pay for income protection insurance are tax deductible. It’s always best to check your individual circumstances with a tax expert.

Do you pay tax on income protection payouts?

Yes – if you make a claim on an income protection policy and you receive payments that replace a percentage of your income, you’d be required to include this as income on your annual tax return.

How to claim income protection

Income protection insurance isn’t designed to cover a loss of income caused by any and every situation.

If you have an income protection policy in place and you suffer an illness or injury that prevents you from working as you’re totally or partially disabled, you should contact the insurer immediately so you can be assessed. The insurer will let you know what information is required to start the claims process and will advise whether you’re eligible for a benefit payment. You should always refer to the insurer’s PDS for the full terms and conditions of the policy.

How do I find out more?

To learn more about Medibank Income Protection, or to ask questions specific to Medibank Income Protection, click here.

 

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Things you should know

1 Eligibility criteria apply. Pre-tax income is defined in the PDS.

Life Insurance

Medibank Life Insurance and Medibank Income Protection (collectively Medibank life insurance) are issued by the insurer, Zurich Australia Limited ABN 92 000 010 195 AFSL 232510 (Zurich). NEOS Direct, a registered business name of NDLI Pty Ltd ABN 70 665 747 277 AFSL 547119, distributes and services Medibank life insurance, which is promoted by NEOS Direct's authorised representative Medibank Private Limited ABN 47 080 890 259 (AR No. 286089) (Medibank).  

Any advice provided is general only and doesn’t consider your objectives, financial situation or needs. You should consider these factors, the appropriateness of the advice, and carefully read the relevant Product Disclosure Statement (which sets out the product terms, conditions and exclusions), Target Market Determination and Financial Services Guide before making a decision to acquire, or continue to hold, the product.

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