Income Protection Insurance

Income protection insurance pays a monthly benefit - capped at roughly 70 percent of your pre-disability income - if you cannot work because of illness or injury. The policy has two settings that do all the work: the waiting period and the benefit period. The waiting period is how long you survive without pay before the benefit starts, from 14 days to two years. The benefit period is how long the benefit keeps paying, from one year to age 65.

The cover can be held inside super or outside it, and the two versions are not interchangeable. Inside super, the premiums come out of your balance and the claims are taxed as income. Outside super, the premiums are higher but generally tax-deductible to you, and the definitions can be tailored. MoneySmart's guidance covers both routes and warns that the cheapest premium is rarely the cheapest policy - the definitions and the waiting period decide the claim.

The mechanics run on the two settings. You earn $100,000, hold a policy with a 90-day waiting period and a two-year benefit period, and illness stops you working in March. The benefit is 70 percent of income - $70,000 a year, roughly $5,830 a month - and it starts after you self-fund 90 days. That is why the emergency fund and the waiting period are the same decision: the buffer funds exactly the gap the waiting period creates. The benefit then pays for two years or until you return to work, whichever comes first.

The inside-versus-outside arithmetic is the second mechanism. Inside super, a $1,500 annual premium comes from the balance and compounds against you for decades; the claim, when it comes, is taxed as income. Outside super, a comparable policy costs roughly $2,200 but the premium is generally tax-deductible, which at a 32 percent marginal rate brings the net cost back to roughly $1,500. The pricing converges, and the differences that remain are the definitions, the benefit period and the claims process - not the premium.

The definitions are the third mechanism, and the one the marketing skips. Indemnity policies check your income at claim time, which matters if your income has fallen since you bought; agreed-value policies pay the agreed amount regardless. The "any occupation" definition pays only if you cannot work in any job you are reasonably suited to, while "own occupation" pays if you cannot do your own job. The income protection calculator prices the benefit against your actual income, and the definitions live in the product disclosure statement, not the advertisement.

For an Australian reader, income protection is the policy that stands between a serious illness and the sale of everything to fund it. MoneySmart's guidance is blunt: your ability to earn an income is your biggest asset, and the cover is priced accordingly. The default cover inside most super funds exists for the same reason - the fund is holding your retirement money and wants it spent on premiums, not on defaults. The waiting period is the part that interacts with everything else on this site: the emergency fund entry covers the sizing of the buffer that funds the gap.

A colleague named Brent (yes, that Brent) held a 90-day waiting period with a $4,000 savings balance, assuming sick pay would cover it. Sick pay covered two weeks; the waiting period ran 90 days; the savings were gone in month two. The benefit started in month four, with the mortgage running on the credit card in between. The highest-leverage thing most Australians can do is match the waiting period to the buffer: 30 days with a thin buffer, 90 days only with six months of essentials banked. Run the income protection calculator on the actual numbers before signing.