How does income protection insurance work?

Income protection insurance pays you a regular benefit if you can’t work for a period of time due to sickness or injury. Put simply, it helps replace a percentage of your income so you can keep covering life’s essentials while you focus on recovery.

With Real Income Protection Insurance, you can be paid up to 70% of your pre-tax income, up to $15,000 a month.

Premiums are generally tax-deductible, which can help offset the cost (but always check with a tax professional as it depends on your personal situation). Plus, you can also have flexibility in how your cover is set up with the ability to apply for a benefit period from 6 months, 1 year, 2 years or 5 years, and a waiting period of either 30 or 90 days. 

In this guide, we’ll cover what income protection insurance is, how it works in Australia, how premiums are calculated, what income protection covers and what it doesn’t, and how to choose the right policy for your needs.

What is income protection insurance?

Income protection insurance (sometimes referred to as salary continuance) is a type of cover that pays a monthly benefit for a set period of time if sickness or injury prevents you from working.

The aim is to help make sure you can keep up with everyday expenses without draining your savings or turning to credit cards. Typical expenses it could support include:

• Rent or mortgage repayments
• Utilities and groceries
• School fees and childcare
• Ongoing medical or insurance costs

Income protection insurance is often taken out in addition to other insurance policies and optional cover, including:

• Life Insurance: a lump sum paid to beneficiaries if you pass away or become terminally ill.
• Total and Permanent Disability Insurance (optional add-on cover): a lump sum if you’re permanently unable to work.
• Serious Illness Insurance (optional add-on cover): a lump sum if you’re diagnosed with a listed condition.

How does income protection insurance work in Australia?

Here’s how it works in practice:

Choosing a policy and provider

Not all policies are created equal. Some cover higher amounts, some pay out longer, and others offer extras like rehab support. 

With Real Income Protection Insurance, you can set your waiting and benefit period so your cover lines up with your circumstances. Plus, you’ll gain access to other handy benefits, including a recurrent disability benefit (meaning into your injury or sickness reoccurs within 6 months of your last claim, it will be treated as a continuation of the previous claim) and a final expenses benefits (meaning your family can receive $10,000 to cover funeral costs and other final expenses), just to name a few.

Application and acceptance

When you apply, Real Income Protection Insurance will ask for:

• Your age, occupation, and lifestyle details
• Income and employment information
• Relevant health and medical history

To be eligible to apply for this policy, you be:

• An Australian resident
• Earning an income
• Working more than 15 hours per week
• Aged between 18 and 60

This is what is used to work out eligibility and assess the cost of your premiums. 

Paying your premiums

Premiums can be paid monthly or annually. Some people spread the cost monthly, but annual payments are another option if you prefer one payment. Like most insurers, Real Income Protection Insurance premiums increase with age because the likelihood of a claim tends to rise over time as we get older.

Making a claim

When it comes to making an income protection insurance claim, the process is straightforward. You’ll need:

• Medical evidence from your doctor
• Proof of income, such as payslips or tax returns
• Any other documentation requested by your insurer

Once approved, benefits typically start after your chosen waiting period is over.

How is your payment calculated?

Your benefit depends on your pre-tax income before you stopped work, is generally up to 70% of your income and can be capped at a certain figure per month. Your chosen waiting and benefit periods also play a role in how your payments are calculated.

For example, with Real Income Protection Insurance, if you earn $6,000 a month (pre-tax), you could receive up to $4,200 each month until you’re fit to return to work or your benefit period runs out. 

How long until payments start?

With Real Income Protection Insurance, you can choose a waiting period of either 30 or 90 days. The waiting period is the time you have to wait before your income benefit payments are payable and will affect the cost of your monthly premiums.  A shorter waiting period can mean faster access, but premiums tend to be higher. A longer wait often means lower premiums but also means you’ll need savings, annual or personal leave, or other financial support in place until the benefit kicks in.

How are benefits paid?

Payments are typically made monthly, by direct deposit into your bank account. These benefit payments are designed to come in regular instalments for a set period of time so bills can continue to be paid on time.

Are the payments taxed?

Yes, income protection insurance benefits are taxable at your marginal rate. Depending on your circumstances premiums can be tax-deductible. Make sure to speak to a tax professional to understand your unique situation.

How long will you receive payments?

Benefits usually stop when you return to work, or when your chosen benefit period ends — whichever comes first. With Real Income Protection Insurance you can apply for a benefit period of 6-months, 1-year, 2-years, or 5-years. The benefit period is how long the monthly payments will last if you remain unable to work due to your illness or injury.

Returning to work

If you return part-time, benefits adjust to reflect your reduced earnings. If you return full-time, payments stop. Real income Protection Insurance also provides rehabilitation benefit, meaning we may reimburse up to an additional 50% of your income benefit each month you participate in your rehabilitation program, for up to 6 months, to the maximum of $3,000. Alternatively, we may reimburse up to 6 times the income benefit toward costs to assist you to return to work.

How are income protection insurance premiums calculated?

When it comes to income protection insurance, there are a range of factors that are used to calculate your premiums.

What is covered and what isn’t

Covered:

A sickness or injury that stops you from working, including: 

• Injuries: Back injury, hearing loss, loss of vision, broken arm or leg, amputation, brain injury, nerve damage or burns
• Sicknesses: Arthritis, rheumatoid arthritis, epilepsy, heart attack, Parkinson’s disease, mental illness, chronic obstructive pulmonary disease or cancer

Rehabilitation and return-to-work support

Not covered:

• Self-inflicted injury or attempted suicide
• Illegal activities
• Drug or substance abuse
• Normal pregnancy or childbirth

Exclusions are standard across the industry, and for a better understanding of what these include, check the insurer’s product disclosure statement (PDS).

Types of income protection insurance

Income protection insurance can be secured in a range of different ways.

Income protection through your super

Some super funds include income protection insurance by default or let you opt in. While this can seem like an easy option, the cover offered is usually limited and less flexible. You can read more in our guide to income protection through super.

Retail insurance policies

Purchased directly from an insurer or adviser, retail cover can generally offer higher benefit limits, more options, and flexibility. This is the type of policy Real Income Protection Insurance provides.

Interested in learning more about whether IP insurance suits your unique circumstances? Read our guides to income protection insurance for sole traders or income protection insurance for the self-employed.

Level vs stepped premium policies

• Stepped premiums: Start lower, rise as you age.
• Level premiums: Steadier over time, higher at the start.

Real Income Protection Insurance offers stepped premiums, which can be cost-effective when you first take out cover.

Frequently asked questions

To make things simple, we’ve answered some of the most common questions below. Each answer is designed to stand on its own, so you can quickly find the information you need without having to read the entire article.

Does income protection cover mental health?

Yes, income protection insurance can cover mental health, but it is best to check the PDS. If you’re diagnosed with a mental health issue after taking out Real Income Protection Insurance, you can make a claim for loss of income if you’re unable to work. Pre-existing mental health conditions are generally not covered.

What if my income changes or fluctuates?

If your income changes or fluctuates, your Real Income Protection Insurance benefit will be based on your earnings before you stopped working. When you apply, you’ll be asked for proof of income, such as payslips or tax returns. If your income goes up or down after taking out cover, you may want to review your policy to make sure the benefit amount still matches your needs.

Can I get income protection insurance if I’m self-employed?

Yes, you can get income protection insurance if you’re self-employed. Real Income Protection Insurance is available to employees, contractors, and self-employed people, provided you meet the eligibility requirements. You’ll need to provide financial documents such as recent tax returns to show your earnings.

Will workers' compensation or Centrelink payments affect my benefit payments?

Yes, workers' compensation or Centrelink payments may affect your benefit payments. With Real Income Protection Insurance, any benefit you receive could be offset by payments you’re already getting from workers' compensation, Centrelink, or other income protection policies. This is to make sure your total benefits don’t exceed the maximum cover amount.

I have plenty of sick leave, do I really need income protection?

Even if you have plenty of sick leave, income protection can still be valuable. Sick leave usually covers short-term absences, but it may not last if you’re away from work for months. Real Income Protection Insurance is designed for longer-term illness or injury, with cover that can provide up to 70% of your income (up to $15,000 per month) for your chosen benefit period. It’s there to support you once sick leave runs out.

Choosing the right policy for your needs

The best policy is one that matches your current needs and lifestyle, but has the flexibility to shift as life changes. Consider your income, debts, dependents, and future plans

If you're thinking about taking out cover, consider Real Income Protection Insurance. Request a quote online today and take a proactive step towards protecting your livelihood — just in case you get sick or injured and can’t earn an income.