What is Income Protection and How Does it Work?

There are a lot of questions to ask and answers to give for those of us with a limited knowledge of income protection insurance. You may have a few questions in your mind.

  • What is the primary purpose of income protection insurance?
  • What is covered by it?
  • Who is it for, and will it be required?
  • What are the factors that you need to consider in order to keep your premiums down?

You’re not alone in having so many questions on your mind. Income is a major part of your life, and you should find the best policy that suits your needs.

Here is a guide that will answer the most important questions about Income Protection Insurance. This article will help you understand how it all works and why you should invest in Income Protection Insurance.

What is income protection insurance?

Imagine that you are the only person in your family who puts food on the table and is earning a good wage to provide for all of your family’s needs. Imagine that you are the sole breadwinner in your family. You make a good salary to support your family and provide them with all they need for daily life. One fine day, you become ill and cannot attend work for a long period. Your finances are in a mess because your income has stopped. You have to pay bills, fees, and food. You’ll be in debt if you add in your medical costs. Your savings might also run out very soon. Your standard of living could be in danger. What can you do when it happens?

Isn’t this a frightening thought?

A steady income can give us peace of heart. Tragedies can strike anyone at any time and without warning. It would be best if you were prepared to cover your financial needs beyond savings. Income protection can help. Income Protection can provide you with up to 75% monthly of your income in the event that you cannot attend work because of a serious illness, accident, or injury. In the 2015-16 fiscal year, there were approximately 10700 claims by Australian workers for serious illness and injury. This accounted for 77% of direct and indirect costs. This is a staggering number, and it emphasizes the importance of income protection.

What does Income Protection Insurance cover?

Income Protection Insurance is calculated based on your average earnings over the 12 months prior to making a claim. You can get a maximum of 75% of your monthly income covered by the insurance. This will give you maximum benefits each month. Below are three different types of income protection policies.

  • The policy provides you with a fixed income benefit, valued according to what you were earning at the time you purchased it.
  • Guaranteed Agreed Value (GAV): This policy is similar to Agreed Value, but insurers require that you provide information about your income.
  • Indemnity value: This policy will cover your income benefit. It is valued at the amount you earn when you file a claim.

If you want complete coverage, it is possible to combine your income protection policy with another insurance policy that will cover income loss. You can choose from the following guidelines:

  • Life Cover or Term Insurance Policy: This policy covers you and your beneficiaries in the event of a terminal illness or untimely death.
  • Trauma insurance: This is also a lump-sum amount you can benefit from if you suffer a serious illness or injury.
  • Total Permanent Disability: This policy will cover you in the event that you become permanently disabled as a result of an accident. This is often bundled with life insurance.

Be sure to carefully read all terms and conditions before you choose an insurance policy. This will ensure that it suits your needs. It is important to know the requirements under which you may claim as well as how much you will receive when you do.

Considerations to make before purchasing income protection insurance

Before applying for Income Protection Coverage, you should consider certain factors. These factors will affect the amount of coverage that you receive and the premiums you pay. Consider the following list.

  • Age is not just a number. It’s a very important factor to consider when purchasing insurance. If you’re older when you apply for insurance, your premiums will increase because you run a higher risk of getting sick or injured.
  • Gender: In this case, premiums are higher for women because they take more time off from work, especially during pregnancy, and are also at higher risk of complications and health risks during childbirth.
  • Existing health conditions. If you are currently undergoing treatment or have been injured, your premiums may be higher, and you will need to wait longer before you can make a claim.
  • Have you ever had a medical condition before? Your premiums will increase if you have a history of medical conditions.
  • A risky occupation such as a skydiving instructor or a miner will result in higher premiums compared to a more sedentary one like a banker. High-risk occupations are more likely to cause injury or death.
  • What kind of lifestyle do you lead? Do you like to be adventurous, or do you prefer a more relaxed lifestyle? Your premiums will increase if you are exposed to more risks because of your lifestyle.
  • Smoking is harmful to your health as well as your premiums. Smoking puts your health at risk so premiums will increase. If you quit smoking at least 12 months before applying for Income Protection, you will be deemed a non-smoker. You can get a discount on your premiums.

Keep your insurer informed about any information that may be relevant to the claim. You should not hide information from your insurance company. They will discover it and may reject your claim due to discrepancies. It is important to know that your premiums will also decrease the longer you delay making a claim.


Income protection must meet your needs in the event of death, serious injury, or disability. Before you invest, make sure that the amount is enough to protect you and your family in the event of a sudden accident.

The majority of Australians do not want to invest in Income Protection and push the idea out of their mind. It is important to understand that even though the concept of income protection is frightening, the investment will be worth it. Imagine being able to take care of your family and yourself without having to worry if you are out of work. It would be great to know that everything is taken care of in your absence. If you haven’t applied yet, now is the time. It’s best to be prepared and armed at all times.

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