Income Protection Insurance – Safeguarding your future.

Income Protection Insurance – Safeguarding your future.

Income Protection Insurance

Income protection insurance protects you by paying an ongoing income if you are unable to work due to illness or injury.

Benefits

Income protection cover pays an ongoing monthly benefit to protect:

  • your lifestyle by replacing your lost salary so you can continue to meet some of your living expenses and debt repayments, and
  • your wealth by reducing or removing the need to sell assets to generate income.

Without insurance, you may need to run down your savings, sell assets, and/or rely on family or Centrelink for assistance.

You may find it difficult to maintain your standard of living or pay for the care and medical assistance you need. This can cause unnecessary financial stress during an already difficult time. 

How it works

Income Protection is designed to replace a percentage of your income (this can vary, depending on your contract, typically around 70-75%). 

The length of time that you’re covered will depend on your contract, however, the most common benefit periods are two years, five years, or up until you turn 65. 

Your level of coverage is calculated based on annual earnings at the time of the claim. Some insurers may also pay Superannuation Guarantee contributions in addition to the earnings covered.

The payments are taxable income but tax may not be deducted from each payment. So you should seek tax advice and make sure you set aside money to pay your tax liabilities. If paid through superannuation, tax is usually deducted from each payment to help you manage this obligation.

The amount you receive may also be reduced if you receive payments from sick leave, social security, workers compensation or other legislative sources.

Indemnity policies

With an ‘Indemnity’ policy the amount you receive at the time of a successful claim will be assessed on the basis of your earnings in the 12 months prior to the disability.

You will need to provide proof of income at time of claim and if your income has reduced you may receive less than expected.

Effective 1 April 2020, the Australian Prudential Regulation Authority (APRA) implemented measures to address the poor performance of personal income insurance policies.

As a result, ‘Agreed Value’ income protection policies are no longer to be offered by life insurance companies. ‘Agreed Value’ policies were found to violate the principle of indemnity, insomuch that an insurance policy benefit should not exceed a policyholder’s economic loss, and an ‘Agreed Value’ policy may enable this.

This change enables income at risk to be closely tied to the individual’s earnings at the time of a claim and further encourage claimants to return to work (where possible).

‘Agreed Value’ income protection policies established (or in force) prior to 1 April 2020 may continue.

Waiting and benefit periods

In the event of a successful claim, benefit payments do not start immediately; a waiting period will apply during which no benefit is payable. The waiting period can be as short as 14 days or as long as two years. When choosing a waiting period, it’s important to take into account any sick leave and related benefits provided by your employer. The shorter the waiting period, the higher the premium.


The maximum period of time that payments continue is called the benefit period. A range of benefit periods are available – some as short as one year, with the longest continuing through to your 65th or 70th birthday. In general the longer the benefit period, the higher the premium.

Waiting and benefit periods

Optional Benefits

Income protection policies may offer important options including:

  • an Increasing Claims option that ensures benefit payments are indexed in line with inflation
  • a Superannuation Cover option that allows you to have contributions made to your superannuation fund (above the level of salary cover)
  • other ancillary and rehabilitation benefits.
additional benefits of income protection insurance
Insurance policy ownership

See below for an explanation of the most common ownership structures (self-ownership and superannuation ownership).

Self-ownership
Owning the policy in your own name may allow you to better tailor the cover to suit your individual requirements (e.g. to obtain more comprehensive benefits and ancillary benefits).

With self-owned cover, you pay the premium from your cashflow.

The premiums are tax deductible to you and benefits that you receive in the event of a successful claim are treated as taxable income and taxed at your marginal tax rate.

Superannuation ownership
You may also be able to purchase your cover in your superannuation fund. This allows the premium to be paid by making contributions to super or simply be deducted from your superannuation account balance so it does not affect your cashflow.

The premium is a deductible expense to your superannuation fund and can reduce the tax payable on contributions and investment income.

The benefit to you will depend on your superannuation fund.

If additional contributions are made into superannuation to cover premiums it is important to ensure you do not exceed the limits on how much can be contributed.

The proceeds in the event of a successful claim may be paid from your superannuation fund as a temporary illness benefit and will be assessable income that is taxed at your marginal tax rate.

You will first need to meet the release definition for superannuation which may be harder to meet than a self-owned policy.

BLOG: THERE’S NO SUCH THING AS CANCER LEAVE – ALEX’S STORY

We recently caught up with Orbital Life client (and cancer survivor, and working professional) Alexandra (Alex) Baily, who had an important message she wanted to share about her journey. Read on for a case study from a highly resilient person. 

Contact Orbital Life. We’re happy to help.