The question most people avoid
How long would your savings last if you could not work? Not a week. Not a month. A sustained period, six months, a year, longer.
For most Australians, the honest answer is uncomfortable. The average household savings buffer is not large. Most people have enough to cover a short-term disruption, not a serious one. Income protection insurance exists to bridge the gap between the end of your savings and the point where you can work again.
What income protection insurance does
Income protection insurance pays you a portion of your regular income, typically up to 70%, if you are unable to work due to illness or injury. Payments are ongoing, not a one-off lump sum. They continue until you return to work, until the benefit period ends (which is defined in your policy), or until you reach the specified age limit, usually 65.
There is usually a waiting period before payments begin, commonly 30, 60 or 90 days after you first become unable to work. The longer the waiting period you choose, the lower your premiums. If you have enough savings to cover 90 days, a longer waiting period can be a cost-effective choice. If you do not, a shorter one matters.
Your income is your most valuable asset
People insure their homes, which are worth hundreds of thousands of dollars. They insure their cars. They are far less likely to insure the thing that actually generates all of it: their ability to earn an income.
Consider what your income is worth over time. Someone earning $90,000 per year who is currently 35 and plans to work until 65 has around $2.7 million in future earnings ahead of them. That is an asset. Most people would not leave a $2.7 million asset unprotected. But without income protection, that is exactly what they are doing.
Mental health is the leading cause of income protection claims
This surprises a lot of people. The number one reason Australians make income protection claims is not a physical injury or a cancer diagnosis. It is mental health, primarily anxiety and depression. Claims related to mental illness have grown consistently over recent years, and now represent the single largest category across most major insurers.
This is worth knowing for two reasons. First, it challenges the assumption that income protection is only for people doing physically risky work. Office workers, professionals, and people in sedentary jobs are just as likely to make a claim as tradies or manual labourers. Second, it is a reminder that the events most likely to stop you working are not always the ones you can anticipate.
The difference between income protection inside and outside super
Income protection can be held inside your super fund or as a standalone policy outside super. There are meaningful differences between the two.
Cover held inside super is usually funded from your pre-tax super contributions, which can make it feel more affordable in the short term. However, benefit periods through super are often shorter (two years is common), definitions of disability can be broader and harder to meet, and claiming through super can trigger tax implications on the payout. Standalone policies held outside super tend to offer longer benefit periods, more flexible definitions, and the ability to index benefits to inflation. Premiums are also tax-deductible for most people.
The right answer depends on your situation. A good adviser will compare both options against your actual needs, not just your premium budget.
Who income protection is most important for
If you have dependants, a mortgage, or financial obligations that your household could not sustain without your income, income protection should be part of your insurance picture. This includes employees, self-employed people, business owners and contractors. It is particularly important for anyone who does not have a substantial savings buffer or an employer who would continue paying them through an extended absence.
If you want to understand what cover you have, what you might be missing, and what it would realistically cost, our team is happy to have that conversation. Book a chat at shirelifeinsurance.com.au.