What is income protection insurance?

How it works

Income protection replaces part of your lost income each month. Most policies pay 70-75% of your pre-tax income, though some retail policies go up to 85%, check the product disclosure statement for your exact cap. Two variables shape every policy:

Waiting period. The gap between when you stop working and when your first payment lands. Common options are 14, 30, 60 or 90 days, the longer you can wait, the cheaper the premium. If you've got a few months of expenses saved, a longer waiting period can cut your premium noticeably.

Benefit period. How long payments keep coming if you remain unable to work: 2 years, 5 years, or through to age 65 or 70. A 2-year benefit period sounds like plenty, but serious illness or injury can sideline someone far longer. A policy to age 65 costs more upfront but is the only version that genuinely covers long-term disability.

Inside super vs outside super

Plenty of Australians already have some income protection, they just don't know it. Most super funds bundle in default cover, so check your super fund's insurance statement before buying anything new.

Paying inside super doesn't touch your take-home pay, but it chips away at your retirement savings and the cover is often more restricted, with a lower benefit cap. Paying outside super costs you cash flow each month, but premiums are generally tax-deductible and you get more control over the policy design. Neither is automatically better, it depends on your cash flow, tax rate and how much flexibility you want.

Is it tax-deductible?

Usually, yes, if you hold the policy outside super. Premiums on a personal income protection policy are generally tax-deductible because the policy protects your income-earning capacity. You can't deduct premiums paid through your super fund, or the part of a bundled policy relating to life or TPD cover.

One thing that surprises people: any benefit payments you receive are taxable income. You need to declare them, they're treated as replacement income, not a windfall. This applies whether the policy sits inside or outside super. Confirm the current rules with a registered tax agent or at ato.gov.au before relying on this for your own tax return.

A worked example

Jake is a 34-year-old electrician earning $95,000 a year. He breaks his wrist on a job and can't work for four months. His policy has a 30-day waiting period and pays 75% of pre-tax income, about $5,938 a month. After the wait, he receives three months of payments, roughly $17,813 in total, enough to cover his mortgage, utilities and groceries while he recovers, without raiding his super or selling investments.

What it doesn't cover

Read the product disclosure statement carefully. Standard exclusions include:

• Pre-existing conditions, usually excluded outright or loaded after underwriting
• Redundancy or job loss, that's a separate, much harder to find, product
• Self-inflicted injury
• Mental health claims, some policies cover these, others apply stricter rules, check this closely
• Risky hobbies or occupations, which can attract exclusions or loadings

If a policy doesn't ask many health questions upfront, it almost certainly has broader exclusions built in. There's no free lunch.

How it relates to TPD insurance

Income protection is one piece of a broader personal insurance picture. TPD (Total and Permanent Disability) insurance is a related but different product: it pays a one-off lump sum if you're permanently unable to work, rather than an ongoing monthly benefit while you recover. The two can complement each other, income protection covers you during recovery, TPD covers the scenario where you never return to work.