Calculate How Much Income Protection You Need

Published: February 6, 2019

Income protection premiums are expensive, so you might be wondering if the cost justifies buying or continuing a policy which you may never use.

Generally, if you rely on your income to help you pay your day-to-day living expenses, rent/mortgage or support your financial dependents, you should consider income protection insurance to protect you and your loved ones should you be unable to work because of an injury or illness.

However, the amount of coverage you need and the premium you’ll pay should be calculated based on your unique requirements and budget. In this article, we'll aim to help you determine how much income protection you need and what you can expect to pay.

Buy Income Protection Directly

Policy Maximum Monthly Benefit Percentage of Income Covered Benefit Period Waiting Period  
NobleOak Direct Income Protection AIA
$25,000
75%
2 years or up to age 65
30 or 90 days
Receive up to 75% of your monthly income with Income Protection Insurance. Cover essential living expenses when you’re unable to work due to an illness or injury. Consider the PDS. Issuer is NobleOak Life Limited ABN 85087648708. AFSL 247302.

What will you're income protection policy cover?

For many Australians, income protection insurance is one of the most important types of insurance because it protects you against the risk of not being able to earn a salary because of an illness or injury, which could lead to you being unable to afford life’s necessities.

An income protection policy generally:

  • Pays you a monthly benefit,
  • Up to 75% of your regular income,
  • If you can’t work for longer than your waiting period,
  • Because of an accident or sickness.

Just as important as knowing what you're covered for, is knowing what you are not covered for. Generally, an income protection payout won’t be valid if you claim because of:

  • Being made redundant.
  • Getting fired.
  • Normal pregnancy, childbirth or miscarriage.
  • Intentional self-inflicted injury.
  • Service in armed forces of any country.

It’s vital that you carefully review your product disclosure statement (PDS) that lists the terms and conditions for which your policy will and will not pay a claim.

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How much income protection do you need?

The amount of income protection insurance that will be enough for you depends on your current salary and personal requirement, for example, your monthly expenses, family structure, your savings and outstanding debts. In general, people tend to insure up to 75% of their income. To determine the amount of cover you need, consider all your expenses and financial responsibilities.

You might want to start with the big bills first, like your rent/mortgage, car payments, utilities, groceries and children’s education. After that, include your more discretionary bills, for example, gym membership, Netflix account, and restaurant visits.

Calculate your monthly benefit

A great starting point in determining the income protection benefit you’d need month-on-month is by multiplying your personal exertion income with .75 and then dividing that total by 12 months. Typically, people elect to cover 75% of their salary.

Once you have that number, you might want to refine your estimated monthly benefit amount by using income protection insurance calculators you can easily find online. You might also want to try some of the other popular calculators, like:

  • Personal budget calculators.
  • Cost of living calculators.
  • Salary calculators.
  • Income and expenditure calculators.

It’s essential that you know how much income protection insurance you need to maintain your current lifestyle before comparing policies form major life insurance companies.

How much income protection can you claim?

You can generally claim up to 75% of your personal exertion income, which typically includes your regular salary plus super contributions plus commissions and bonuses, and car and travel allowance. When you'll receive your monthly benefit and for how long is usually dependent on the specifics of your income protection plan.

Select insurers may offer you the option to insure your income for up to 80% with the additional 5% going towards paying your mortgage or superannuation. This extra 5% is usually only payable for a maximum of two years.

Remember, you'll need to prove your personal exertion income either at application or claim time, depending on your policy, and you cannot insure yourself for more than your salary.

Important: If your salary exceeds $320,000 a year, insurance companies will typically begin to reduce your benefit period, and might only allow you to cover up to 50% of your income. When you've passed $500,000 per year, insurers will generally provide cover up to 25%. However, select insurers might offer $40,000 and $60,000 maximum monthly benefits. It all depends on which insurer you choose and the type of policies they offer.

Criteria when claiming income protection insurance

Whether your income protection claim is valid will also depend on the type of definition applied to your policy:

  • Duties based: Unable to perform 1 or more duties critical to the performance of your specific occupation.
  • Hours based: Unable to work at least 10 hours a week.
  • Income-based: Unable to earn at least 20% of your total income.

Take note: Duties based income protection is in generally the criteria most frequently provided by insurers, with select companies giving you the option of hours- or income based. Your claim will also be dependent on the advice of a medical practitioner, whether or not you can return work following an illness or injury.

How quickly will your claim pay-out?

In your policy documents, it will state your waiting period – the amount of time you need to be unable to work as confirmed following the advice of a medical practitioner. Waiting periods can range from 14, 30, 60, 180 days, 1 year or 2 years.

Income protection payments are made in arrears, so you’ll generally receive your first monthly payment 1 month after serving your waiting period. For example, if your waiting period if 60 days, you’ll generally receive your first payment after day 90.

How does the monthly benefit payments work?

After serving your waiting period, you’ll start accruing your monthly benefit. You’ll typically continue to receive your monthly benefit until you’ve reached your maximum benefit period, as outlined in your policy documents, or until you are able to go back to work, whichever comes first.

Benefit period options can range from 2 years, 5 years, or up to your age 65 or 70, depending on your insurer and policy type. You need to remain eligible to receive income protection for your benefit period to continue.

What does income protection insurance cost?

The premium you pay for an income protection policy that covers up to 75% of your income depends on a variety of factors. Some of these you can influence, like your cover amount, premium structure, choice of benefit and waiting period, others you can't, such as your age, gender and occupation type.

What’s the average cost of income protection insurance in Australia?

To cover up to 75% of your regular income with a standard Indemnity income protection policy with a 30-day waiting period and 2-year benefit period, a non-smoking Australian male earning $80,000 annually as an accountant living in NSW can expect to pay about $26.51 in stepped premiums per month (February 2019).

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How are your premiums calculated?

There are a number of policy options and personal details that can either decrease or increase your income protection premium. Lengthening your waiting period and lowering your benefit period are two of the ways you can help make your policy more affordable. Just ensure that it's still appropriate to your unique requirements.

The main factors influencing the price of your income protection policy usually include your:

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Age: The younger you are when purchasing a policy, the cheaper your monthly premiums tend to be because the risk of a claim is lower, and the insurer has longer to collect premiums from you.

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Health: If you have a medical history that increases your risk of lodging a claim, the insurer might add a loading to your policy, meaning you pay more for the same level of cover.

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Smoking status: Smokers are generally more likely to be at risk of developing certain medical conditions and will thus usually pay more in premiums.

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Your occupation: When employed in a dangerous trade, for example as a firefighter, an insurer may increase the cost of your premium to cover the extra risk.

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State: Where in Australia you live can also affect the cost of your policy.

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Level of cover: The higher the amount of cover you're applying for, the more expensive your policy will usually be.

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Premium type: You might have a choice of premium structure, such as stepped, level or hybrid.

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Waiting period: 14, 30, 60, 180 days, 1 year or 2 years.

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Benefit period: 2 years, 5 years, up to your age 65 or 70.

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Standard or Plus: Standard policies are generally less expensive because they offer only the basic built-in benefits, while the Plus option typically includes additional benefits, for example, family care or accommodation benefit.

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Agreed vs Indemnity: With an Agreed income protection policy your monthly benefit is determined at the time of application, whereas with an Indemnity policy your monthly payment is calculated at claim time.

Optional extras: Your premium will increase when you add optional benefits which requires you to pay an additional cost.

Cheap income protection insurance for 2019

Company and Policy name Monthly premium
Male
Monthly premium
Female

Insurance with On Track – Income Protection
$24.86 $37.40

Priority Protection – Income Protection
$28.32 $42.48

Life Solutions – Income Protection
$32.28 $48.15

Protection – Income Protection Standard
$33.81 $47.37

Protection Plans – Income Protection
$34.46 $50.49

OneCare – Income Secure Essentials
$36.32 $50.31

Complete – Income Protection
$37.17 $52.75

CommInsure Protection – Income Care
$39.17 $55.82

Accelerated Protection – Health Sense – Income Protection Standard
$40.50 $54.09
Source: ComparinExpert Online Quote Tool

Above cheap income protection insurance premiums are based on a non-smoking person living in NSW purchasing an Indemnity income protection policy to protect their annual salary of $75,000. They've chosen a 30-day waiting period and 2-year benefit period with a stepped premium structure (February 2019).

7 Ways to find affordable income protection insurance in Australia

  1. Increase your waiting period: Review your savings and additional income stream and ask yourself how long you can go without an income.
  2. Decrease your benefit period: The longer your benefit period, the more expensive your premiums will typically be. While income protection to age 65 is a popular choice, you may wish to reduce your benefit period to 2 years or 5 years to make your policy more affordable.
  3. Remove CPI increases: Each year, your cover will automatically increase according to inflation. You can opt out of this increase if you wish, which will stop your cover amount from increasing to keep up with the inflation.
  4. Only cover what you need: While income protection can generally cover up to 75% of your salary, you may not necessarily need this amount. Carefully decide what amount of cover would be most suitable for you.
  5. Compare quotes: Gather income protection quotes and compare their premiums, waiting - and benefit periods and built-in benefits.
  6. Remove unnecessary options: Income protection generally offers a number of additional cost options such as bed confinement and day 1 accident cover. Considering removing some of these options to reduce your premiums.
  7. Speak with an insurance specialist to help you in the decision-making process, so you can feel comfortable that you'll be able to afford your premium in the long-term and confident that the policy will pay out when you need it most.

Frequently asked questions and answers

Are income protection premiums tax deductible?

Yes, premiums are generally tax deductible when held outside of superannuation and the amount you’ll get back is based on your marginal tax rate.

Will my monthly benefit be taxed?

Yes, because income protection insurance is viewed as part of your regular income and must thus be taxed as such.

Why do women pay so much more for income protection?

According to Australian statistics, women are typically more likely to claim income protection, especially relating to mental health and female cancers.

Do I have to cover 75% of my income?

No. How much income protection you choose to purchase is up to you and should be based on the amount you need to maintain your current lifestyle. You can choose to insure yourself for less. However, it might be best to discuss your options with an insurance broker.

Can’t I protect 100% of my income?

The primary reason most insurers generally only cover up to 75% of your regular income is that there needs to be motivation for you to return to work after you've recovered from your illness or injury.

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