Income Protection and Redundancy: What's Actually Covered
Income protection does not cover redundancy. Here's what does, what your redundancy pay is actually worth, and how to genuinely protect yourself.
By Timothy Hirou GaschereauPublished 8 min read
Redundancy and a serious illness both end with the same gut punch: your income stops. So it is completely understandable that people assume income protection insurance covers redundancy. It does not. Not a cent.
This guide is only about the redundancy angle. If you want the full explainer on the product itself, we have separate guides on what income protection is and what income protection does not cover. Here we answer the one question people actually search for: what happens if you are made redundant. General information only, not advice.
🎯 The essential: Income protection pays when illness or injury stops you working, never when your employer cuts your role. Redundancy has its own entitlements under the National Employment Standards, with a tax-free component for genuine redundancies. Standalone redundancy cover exists but is niche, heavily restricted, and rarely worth it. Your real safety net is an emergency fund of 3 to 6 months of expenses: no exclusions, no waiting periods, no claim forms.
The short answer: it does not cover redundancy
Income protection pays when you physically or mentally cannot work due to illness or injury. A bad back, a cancer diagnosis, a serious mental health episode: it replaces a portion of your income (typically up to 70%). Being made redundant is a completely different situation. You can work. You are ready and willing to work. You just no longer have a job.
This is not a loophole or a fine-print trick. Every standard income protection policy in Australia explicitly excludes unemployment, redundancy and retrenchment. It is simply how the product is designed and priced.
Why people confuse the two
The names do not help. “Income protection” sounds like it protects your income from anything. Some insurers also bundle different products together, which blurs the lines further. And most people do not read the PDS until they need to claim, which is the worst possible time to find out what is covered.
The mental model to keep: income protection covers the risk that your body or mind stops working. It does not cover the risk that your employer stops needing you.
What redundancy actually pays you
Before you worry about insurance, know what you are already entitled to. Under the National Employment Standards, employees genuinely made redundant get redundancy pay based on continuous service:
| Years of continuous service | Redundancy pay |
|---|---|
| 1 to 2 years | 4 weeks |
| 2 to 3 years | 6 weeks |
| 3 to 4 years | 7 weeks |
| 4 to 5 years | 8 weeks |
| 5 to 6 years | 10 weeks |
| 7 to 8 years | 13 weeks |
| 9 to 10 years | 16 weeks |
Casuals, contractors and employees of small businesses (fewer than 15 staff) generally do not qualify, and your enterprise agreement may pay more than the minimum. On top of redundancy pay you should also get notice pay, unused annual leave, any long service leave, and outstanding wages.
The tax break matters. Genuine redundancy payments have a tax-free component. For 2024-25 that is $11,985 plus $5,994 for each completed year of service. So five completed years gives a tax-free limit of $11,985 + (5 x $5,994) = $41,955. Anything above is taxed as an Employment Termination Payment at concessional rates. The ATO indexes these figures each year, so confirm the current numbers. Our redundancy pay guide walks through the full picture.
So is there insurance that covers redundancy?
Yes, but it is not income protection, and it comes with a long list of asterisks. It is called involuntary unemployment cover (or redundancy cover), and it pays a monthly benefit if you are involuntarily made redundant. The reality:
- Waiting periods of 30 to 90 days. Find a new job in that window and you get nothing.
- Must be involuntary. Resign or take a voluntary package and you cannot claim.
- Known-redundancy exclusions. If a restructure was announced before you took out the policy, you are excluded. You cannot insure a risk that has already appeared.
- Short benefit periods, usually 3 to 6 months, then payments stop.
- Partial income replacement, not your full salary.
Standalone policies are rare here. You are more likely to meet this cover as an add-on to mortgage protection insurance, or bundled into consumer credit insurance on a loan or credit card. ASIC has repeatedly flagged concerns about the value of those bundled products.
Is redundancy cover worth it?
For most Australians, probably not. The exclusions are extensive, the waiting periods mean you may get nothing if you find work quickly, the known-redundancy exclusion removes the cover exactly when you feel most at risk, and the short benefit periods make it a stopgap rather than a safety net.
The narrow case for it: a mortgage, a single income and no emergency fund, where some cover beats none while you build that fund. But it is a stopgap, not a strategy. The emergency fund below does everything redundancy cover does, with no exclusions, no waiting periods and no insurer to argue with.
What to do instead
Build your emergency fund. Three to six months of essential living expenses in a high-interest savings account is the real redundancy insurance. No waiting period, no exclusions, no insurer reviewing your claim. The money is yours, it earns interest while it sits there, and you can use it the day you need it.
Know your entitlements before you need them, using the Fair Work redundancy calculator, so you can plan how long a payout will last. And do not write off income protection just because it skips redundancy: it covers something just as devastating, the risk that illness or injury stops you working for months or years. If you do not have it, that gap is worth closing separately, starting with how much income protection you actually need.
Frequently asked questions
Does income protection cover redundancy in Australia?
No. Standard income protection insurance only pays out when illness or injury prevents you from working. Redundancy, retrenchment and unemployment are explicitly excluded from every standard income protection policy in Australia.
What is the difference between income protection and redundancy insurance?
Income protection covers you when your body or mind stops working due to illness or injury. Redundancy insurance (involuntary unemployment cover) is a separate, niche product that covers you when your employer eliminates your role. They are different products covering different risks. Most Australians have income protection; very few have redundancy cover.
How much redundancy pay am I entitled to in Australia?
Under the National Employment Standards, redundancy pay ranges from 4 weeks (1 to 2 years of service) up to 16 weeks (9 to 10 years). You need at least 12 months of continuous service and your employer must have 15 or more employees. Check the Fair Work Ombudsman's redundancy calculator for your exact entitlement.
Is redundancy pay taxed in Australia?
Genuine redundancy payments receive a tax-free component. For 2024-25, the tax-free limit is $11,985 plus $5,994 per completed year of service. Any amount above that is taxed as an Employment Termination Payment at concessional rates. Confirm current figures with the ATO, as they are indexed annually.
Can I get insurance that pays out if I am made redundant?
Yes, but it is limited. Involuntary unemployment cover, sometimes bundled into mortgage protection insurance, pays a monthly benefit if you are genuinely and involuntarily made redundant. The catch: waiting periods of 30 to 90 days, short benefit periods of 3 to 6 months, and heavy exclusions including known-redundancy clauses. Read the PDS carefully.
What is the best protection against redundancy?
An emergency fund of 3 to 6 months of essential expenses in a high-interest savings account. It has no exclusions, no waiting periods, no claim process and no insurer to dispute your situation. Pair that with knowing your redundancy entitlements and you are in a far stronger position than any insurance product provides.
Keep reading
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Sources
This article is general information only, not financial advice. Insurance policies, redundancy entitlements and the ATO tax-free limits vary and change. Check the PDS, the Fair Work Ombudsman, the ATO or a licensed adviser for your situation.
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General information only. This article is educational and does not constitute personal financial advice. It does not account for your circumstances. Consider your own situation and seek advice from a licensed adviser before acting. Read our full disclaimer.
Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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