Income Protection Insurance: The Complete Australian Guide
IP insurance replaces 70% of your income if you can't work. Here's how it works, what it costs, and when it's worth it.
Income protection (IP) insurance replaces up to 70% of your gross income if you're unable to work due to illness or injury. It's arguably the most important insurance for working Australians — and the most overlooked.
How it works
You choose a waiting period (usually 14, 30, 60, or 90 days) and a benefit period (2 years, 5 years, or to age 65). After you've been unable to work for the waiting period, the insurer pays a monthly benefit until you recover, the benefit period ends, or you reach the policy's maximum age.
The waiting period trade-off
| Waiting period | Monthly premium | Best for |
|---|---|---|
| 14 days | Highest | No emergency fund, self-employed with no sick pay |
| 30 days | High | Small emergency fund (1 month) |
| 60 days | Moderate | Some savings or employer sick pay |
| 90 days | Lower | Strong emergency fund (3+ months) |
Agreed value vs indemnity value
Agreed value policies lock in your benefit at application — useful for variable incomes. Indemnity value policies pay based on your income at time of claim — if your income dropped, your benefit drops too. Most new policies issued since 2020 are indemnity value only (APRA requirement).
Tax treatment
Premiums for IP held outside super are generally tax-deductible. Benefits paid are taxable income. This makes IP one of the few insurance products with a tax advantage.
Super vs outside super
IP held inside super has lower premiums (no tax on contributions) but the benefit is taxed at 15% (or your marginal rate on withdrawal), and the group default cover is usually inadequate. Most financial advisers recommend holding IP outside super for the deductibility and flexibility.
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