When you’re juggling bills, mortgage payments, and everyday expenses, adding another insurance premium to your budget might seem unnecessary. However, income protection insurance could be the difference between financial stability and financial crisis when you’re unable to work due to illness or injury.
The question isn’t just whether you need this type of cover, but whether you can afford to be without it. Let’s examine the facts and help you make an informed decision about protecting your most valuable asset: your ability to earn an income.
Understanding the Real Risk of Lost Income
Many Australians underestimate how likely they are to experience a work-related injury or illness. According to the Australian Bureau of Statistics, 3.5% of people who worked in the previous 12 months experienced a work-related injury or illness in 2021-22. That translates to approximately 497,300 Australians. Of those affected, 66% had time off work as a result.
The financial impact extends beyond just missing a few days. Data from Safe Work Australia reveals that the median time lost from work-related injuries and illnesses has been increasing over the past decade, with 21.3% of accepted workers’ compensation claims involving 13 weeks or more off work. That’s more than 3 months without your regular income.
Mental health conditions are also a growing concern, now accounting for 10.5% of all serious workers’ compensation claims. These claims have the longest recovery times, with median time lost from work being more than 5 times longer than other injuries and illnesses. If you’re unable to work for an extended period, how long could your savings sustain your lifestyle?
What Income Protection Insurance Actually Covers
Income protection insurance is designed to replace a portion of your income when you can’t work due to illness or injury.
The key features of income protection policies include:
Waiting periods: This is the time between when you’re unable to work and when payments begin, typically ranging from 14 days to 2 years. The longer the waiting period chosen, the lower your premiums will be.
Benefit periods: This determines how long you’ll receive payments if you remain unable to work, ranging from 2 years to age 65. Longer benefit periods provide more comprehensive protection but come at a higher cost.
Policy type: With indemnity value policies, your payout amount is determined by your salary when you submit a claim, whilst agreed value policies (no longer available for new customers since March 2020) were based on a pre-agreed amount.
Who Should Seriously Consider Income Protection?
Income protection becomes particularly important if you fall into any of these categories:
Self-employed individuals and small business owners don’t have access to sick leave or annual leave. If you can’t work, your income stops immediately, but your business expenses and personal bills continue.
Primary income earners with dependents or family members relying on their income face significant pressure. A prolonged period without income could affect not just you, but your children’s education, your family’s housing situation, and overall quality of life.
People with substantial debt such as mortgages, investment property loans, or business loans need to maintain repayments regardless of their ability to work. Missing mortgage repayments could ultimately lead to losing your home.
Those in high-risk occupations face elevated chances of workplace injury. Safe Work Australia’s data shows that community and personal service workers (7.0%), machinery operators and drivers (6.5%), and labourers (5.7%) have the highest rates of work-related injuries.
The Tax Advantage You Shouldn’t Ignore
One significant benefit of income protection insurance is its tax deductibility. The Australian Taxation Office confirms that premiums paid for income protection insurance are generally tax deductible, as long as the policy protects your income from salary and wages.
This means if you’re paying $150 per month for income protection cover, you can claim $1,800 as a deduction on your tax return. For someone in the 32.5% tax bracket, that’s a potential saving of $585 per year, effectively reducing the real cost of your cover.
However, it’s important to note that you can’t claim a deduction if your income protection policy is held through your superannuation fund and premiums are deducted from your contributions. Additionally, components of a policy that provide capital payments (such as trauma or life insurance) aren’t tax deductible.
Calculating Your Income Protection Needs
To determine how much cover you need, start by preparing a comprehensive budget. Calculate your monthly essential expenses including:
- Mortgage or rent payments
- Utilities and household bills
- Insurance premiums (health, car, home)
- Food and groceries
- Transport costs
- School fees or childcare
- Minimum debt repayments
Compare this to your current income and consider what percentage you’d need to maintain your lifestyle. Most people find that 70-75% of their income is sufficient to cover essential expenses when they’ve accounted for work-related costs they’d no longer incur.
Don’t forget to factor in any existing safety nets you have. Do you have adequate emergency savings? Would you receive support from your family? Do you have other insurance policies such as trauma or total and permanent disability insurance that could provide additional financial support? These considerations can help you determine the appropriate level of cover without over-insuring.
Weighing the Costs Against the Benefits
The cost of income protection insurance varies based on your age, occupation, health, lifestyle, and the level of cover you choose. According to industry data, a 35-year-old non-smoking tradesperson earning $80,000 might pay anywhere from $50 to $200 per month depending on their chosen waiting and benefit periods.
When considering the cost, think about the alternative. If you earn $80,000 annually and were unable to work for just six months, you could lose $40,000 in income. Even with some savings, could you maintain your mortgage repayments, support your family, and cover all your expenses during that period?
Industry statistics show strong claims acceptance rates, with the income protection insurance sector averaging a 95% claims acceptance rate in 2024. This means the vast majority of legitimate claims are paid, ensuring policyholders receive the financial assistance they require when they need it most.
Making Your Decision
Income protection insurance isn’t right for everyone. If you have substantial savings that could sustain your lifestyle for an extended period, comprehensive sick leave entitlements, or no dependents or significant financial commitments, you might decide to self-insure.
However, for most working Australians, especially those with families, mortgages, or who are self-employed, income protection provides essential financial security. The peace of mind provided by income protection insurance, knowing that you could maintain your lifestyle and meet your financial obligations even when facing a serious illness or injury, is invaluable.
Before making a decision, review your current insurance needs and speak with a licensed adviser who can assess your individual circumstances and recommend appropriate cover levels. Your ability to earn an income is likely your most valuable asset, and protecting it deserves careful consideration.