Income protection: Why getting it right matters

For most people, their ability to earn an income is their single most valuable financial asset. It pays the bills, funds their lifestyle, and supports their long-term goals. But what happens when an illness or accident suddenly takes that income away?

That’s exactly what happened to Jess, a 30-year-old with two jobs. Her experience shows how having the right income protection policy can make all the difference.

A sudden injury and unexpected time off work

Jess works as a learning support assistant at a primary school, earning $1,760 per week. She also picks up one night a week as a disability support provider, earning another $600 per week.

One night, Jess fell down the stairs in her apartment and suffered a serious ankle injury. Surgery and a long recovery meant she wouldn’t be able to work for at least two months – possibly longer.

Like most Australians, Jess’s injury didn’t happen at work. According to Safe Work Australia, just 3.5% of people experienced a work-related injury or illness in the previous year. The Financial Services Council has found that most income protection claims are the result of accidents, while AIHW data shows that injuries are more likely to occur at home or while playing sport.

This matters because most people in Jess’s situation wouldn’t qualify for workers’ compensation, leaving them exposed if they didn’t have income protection in place.

How Jess’s policy helped

Fortunately, Jess had an indemnity income protection policy that covered both her jobs – a total of $2,360 per week.

Because she took out her policy the year before, she was entitled to receive up to 90% of her income every week for the first six months, then up to 70% until age 65 if she remained unable to work.

The exact benefit would depend on the policy terms and her ability to meet the conditions – but crucially, her policy provided financial security while she recovered.

Not all policies are created equal

Income protection policies vary widely in:

• Percentage of income covered: Some policies cover up to 90%, others only 70–75%.
• Benefit period: Payments may continue for a set number of years, or right up to retirement age.
• Waiting period: The length of time you must be off work before payments begin.
• Premium structure: The cost can differ depending on benefit length, waiting periods, and whether the policy is held inside or outside super.

An adviser can also recommend strategies to manage cost without compromising cover. For example:

Combining two policies – one with a short waiting/benefit period and one with longer terms – to reduce premiums while maintaining solid cover.

Holding one policy inside super and one outside to make the most of cash flow and tax benefits.

Considering how income protection interacts with other insurance types, like total and permanent disability (TPD) cover, to ensure the right mix of protection.

What if Jess had been injured at work?

Income protection policies interact with workers’ compensation. Payments are usually reduced by the amount of any workers’ compensation received.

Let’s say Jess’s policy covered 75% of her total income ($2,360/week) with a 14-day waiting period, and she was injured at her main job in Victoria.

Her income protection would entitle her to $1,770/week once the waiting period ended.

Under the Victorian workers’ compensation scheme, she’d receive 95% of her main income ($1,672/week) for the first 13 weeks.

Her income protection would then top up the difference ($98/week).

Over time, workers’ compensation amounts can decrease, but income protection continues at the agreed percentage for as long as the policy pays benefits.

For high-income earners, the difference can be even more significant. Income protection can cover up to 75% of incomes up to around $300,000 per year, while workers’ compensation in some states cuts out at 95% of about $146,000 per year.

Why advice makes a difference

Not only does an adviser help structure the right policy, but claims success rates are higher for adviser-recommended policies – around 95% compared to 87% for policies bought directly online.

An adviser can ensure your policy:

• Covers your actual income, including multiple jobs.
• Is structured for cost-efficiency and tax effectiveness.
• Is reviewed regularly as your circumstances change.

The key takeaway

Most of us insure our homes, cars, and possessions – but forget to insure the income that pays for them.

Jess’s story highlights how the right income protection policy, set up with advice, can mean the difference between financial stability and stress when the unexpected happens.

Your income is your greatest asset. Protecting it should be a priority.