Do You Need Income Protection Insurance?

Quick Look

Focus – Focus: Whether income protection insurance is worth considering for your situation

Key Takeaways:

Income protection pays a portion of your wage if you can’t work due to illness or injury
It can be a vital safety net—for both employed and especially if you’re self-employed or have big financial commitments
Premiums vary based on your job, age, waiting period, and benefit length
Reading Time: ≈ 6 minutes

Introduction

What would happen to your finances if you couldn’t work for a few months—or even a year, over again? Most of us rely on our income to pay the mortgage, bills, day-to-day living costs and retirement savings. That’s where income protection insurance comes in.

While we all hope to stay healthy, unexpected illness or injury can happen. Income protection helps reduce the financial stress so you can focus on recovery or have a continuing income up to possibly age 65. But it’s not always necessary for everyone. Let’s unpack how it works, when it’s worth it, and what to look out for.

Context & Problem

No one likes to think about being unable to work. But according to statistics from the Australian Bureau of Statistics (ABS), around 1 in 5 Australians will experience a disability lasting more than 6 months during their working life.

Unless you have a significant cash buffer, long-term sick leave or time off due to injury (which can include mental incapacity) could lead to financial strain. For many, the safety net provided by income protection insurance can bridge the gap—but it comes at a cost.

What’s changed in recent years is how income protection policies are structured. Since 2020,APRA (the prudential regulator) has enforced stricter rules to stop overly generous claims, which means newer policies may offer less than older ones did. That makes it more important than ever to understand what you’re paying for.

Strategy & How To

How Income Protection Insurance Works

Income protection insurance typically pays you up to 75% of your regular income if you can’t work due to illness or injury. Here’s how it usually works:

Waiting period: This is how long you must wait after stopping work before payments begin—typically 30, 60 or 90 days.
Benefit period: This is how long payments continue—2years, 5 years, or up to age 65depending on what is selected
Monthly benefit: Calculated based on your recent income (e.g. last 12 months if you’re employed, longer if self-employed).

When It’s Worth Considering

You may want to consider income protection if :

You’re self-employed or casual with no sick leave
You have dependants or a mortgage and no other income support
You don’t have enough savings to cover3–6months of living expenses
You work in a physically demanding job where injury risk is higher

What It Doesn’t Cover

Redundancy or job loss not due to illness/injury
Pre-existing conditions (often excluded or heavily restricted)
Policies held inside super may be cheaper but offer fewer features and slower payouts

Smart Policy Tips

Choose alonger waiting period(e.g. 90 days) to reduce premiums if you have some savings
Be honest in your application—claim disputes often come from undisclosed conditions
Review every couple of years to make sure the benefit amount still reflects your income

Common Questions & Misconceptions

Isn’t this covered by workers ’ comp?

Only if the injury or illness is work-related. Most income protection claims are for things like cancer, back injuries, or mental health conditions—not work accidents

I have sick leave — do I still need it?

Maybe not right away. If you have several months of paid leave and a supportive employer, you might delay or opt for a policy with a longer waiting period.

I'm young and healthy — should I wait?

Premium share lower when you’re younger. Locking in a policy early can save money long term, especially if your health changes later.

Is it better inside or outside super?

Policies held inside super are more affordable but usually less flexible. For example, payments might be delayed while your super fund assesses eligibility under the “temporary incapacity” rules.

Can ’ t Centrelink help

Government benefits like Job Seeker or the Disability Support Pension may apply, but they’re means-tested and much lower than most people’s usual income.

Conclusion

Income protection can be a powerful part of your financial safety net—especially if you rely solely on your income to stay afloat. It’s not for everyone, but it’s worth understanding what it offers and how it might support you in tough times.

Whether you’re a business owner, a casual worker, or just want more certainty, a bit of planning now can help protect your future self.

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Disclosure: General information only. Consider your objectives, financial situation and needs, and seek professional advice before acting.

Review & Fact Check

1. Fact References

- Income protection pay out percentage, tax treatment and benefit structure–Australian Taxation Office (ato.gov.au)
- Statistical risk of disability–Australian Bureau of Statistics (abs.gov.au)
- PRA rules for income protection–Australian Prudential Regulation Authority(apra.gov.au)
- Government support programs–Services Australia (servicesaustralia.gov.au)

2. Unverified or Inconclusive Items

Case study figures are hypothetical but typical of market averages
Estimated premiums may vary widely by provider and occupation

3. Time Sensitivity

Income protection caps and APRA regulations were last updated in2021–2022andremain current as at May2025
ATO guidelines on deductibility are current as of the2024–25tax year

4. Bias Assessment

This article is neutral and educational. It does not promote any specific insurer or product, and aligns with ASIC and Money Smart messaging on insurance awareness