1 in 3
will experience a disability lasting 3+ months before retirement
Up to 70%
of pre-disability income replaceable via income protection
90 days
is how long most savings would last without an income
Picture this: it's a Tuesday morning, and a car accident — or a cancer diagnosis, or a back injury — means you won't be working for the next six months. The mortgage doesn't pause. School fees don't stop. Groceries still need buying. Income protection is the policy that keeps the rest of your life from unravelling.
THE BASICS
How income protection works
Think of it as sick pay — but from an insurer rather than your employer, and designed to last as long as you need it.
Key points
If you become unable to work due to illness or injury, income protection pays a monthly benefit — usually up to 70% of your earnings — for a set period of time. It's not a lump sum: it's a regular income, designed to replace what you would have earned.
For employees, the 70% is based on your gross salary. For business owners, it's calculated on income after business expenses (which can be separately covered under Business Expenses Insurance) but before tax.
You may also be able to add a superannuation contribution benefit on top of your salary cover — protecting your retirement nest egg even while you're out of action. Some policies also include ancillary recovery benefits to help you get back to work sooner.
Tax note: Benefits received are assessable income taxed at your marginal rate. Tax is not always withheld automatically, so set money aside. If your policy is held inside super, tax is usually deducted each payment for you.
Offset payments: Your benefit may be reduced if you're also receiving payments from sick leave, workers' compensation, social security, or other legislative sources
INCOME PROTECTION TIMELINE
1. Illness or injury occurs
Work ceases. The clock starts. A claim is lodged with your insurer. Medical documentation and proof of income are gathered
2. Waiting period begins
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No benefit payable
14 days to 2 years — you choose. Use sick leave & employer benefits during this time. Shorter wait = higher premium.
3. Benefit period begins
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Monthly payments start
1 year, 2 years, 5 years, or all the way to age 65 or 70. Longer period = higher premium.
4. Payments end
When you return to work, or the benefit period expires — whichever comes first. First payment is received one month after the waiting period ends.
Risk Wiz. Tip: Match your waiting period to your sick leave entitlements + accessible savings. Extend your benefit period to at least age 65 if you're a professional — the premium difference is often smaller than people expect.
POLICY STRUCTURE
Three Things That Shape Your Policy
Understanding these three levers helps you design cover that fits your budget and circumstances perfectly.
Indemnity Value Policies
The current market standard
With an indemnity policy, your benefit at claim time is assessed against your income in the 12 months prior to disability — or the highest 12 months in the prior 2–3 years (insurer-dependent).
This matters if your income has dropped since you took out the policy — for example, if you've moved from full-time to part-time, or shifted from employment to building a business.
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Lower premium than historical "agreed value" policies
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Proof of income required at claim time
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Best suited to stable or growing income earners
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Some insurers look back 2–3 years — ask Merlin which
You'll need to provide proof of income at claim time. If your income has dropped since you applied, your benefit may be lower than expected.
Benefit Periods
How long payments continue
The benefit period is the maximum duration your monthly payments will continue. This is one of the most critical decisions — and most people underestimate how long serious illnesses can keep you off work.
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1–2 years: Budget-friendly, covers most short-term illness
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5 years: Balanced protection for the majority of risks
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To age 65: Full coverage for catastrophic, career-ending illness
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To age 70: Available for some professions and occupations
For mortgages and young families, a benefit period to age 65 is worth the extra premium. It's the difference between recovery and financial ruin.
Waiting Periods
How long before payments start
The waiting period is the gap between when you stop working and when your first benefit payment is due. Think of it like the excess on your car insurance.
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14 days: Maximum coverage, higher premium
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30 days: Good for limited sick leave entitlements
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60–90 days: Popular for professionals with sick leave
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2 years: Much lower premium — suited to emergency fund holders
Align your waiting period with how long your employer will pay sick leave. That way your policy kicks in exactly when employer cover runs out. First benefit payment is made one month after the waiting period ends — factor this into your cash flow planning.
Optional Benefits & Add-Ons
Customise for your situation
Well-designed policies offer additional options that can meaningfully improve the value of your cover — particularly over long benefit periods.
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Increasing claims option: Benefit indexed to inflation during a claim
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Superannuation cover: Contributions to super on top of income benefit
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Rehabilitation benefits: Support services to help you return to work
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Ancillary benefits: Varies by insurer — worth comparing
These cost a bit extra and add to your premium. Please seek tailored advice as each insurer has unique offerings and pricing.
POLICY OWNERSHIP
Where Should You Hold Your Cover?
Income protection can be held in your own name, inside your superannuation fund, or — for business owners — through the business itself. Each has different tax and cashflow implications.
Self ownership
Owning the policy in your own name may allow you to better tailor the cover to suit your individual requirements (e.g. to obtain more comprehensive benefits and ancillary benefits). With self owned cover, you pay the premium from your cash flow. The premiums are tax deductible to you and benefits that you receive in the event of a successful claim are treated as assessable income and taxed at your marginal tax rate.
Superannuation ownership
You may also be able to purchase your income protection cover in your super fund. This allows the premium to be paid by making contributions to superannuation or simply be deducted from your super account balance so it does not affect your cash flow. The latter option will reduce your retirement benefits.
The premium is a tax deductible expense to your super fund and can reduce the tax payable on contributions and investment income. The benefit to you will depend on your superannuation fund.
If additional contributions are made into super to cover premiums it is important to ensure you do not exceed the limits on how much can be contributed.
The proceeds in the event of a successful claim are paid from your superannuation fund as a temporary incapacity benefit and will be assessable income that is taxed at your marginal tax rate.
In some circumstances, even if an insurer would otherwise pay a benefit to your superannuation fund, they may not be able to do so unless a ‘condition of release’ is met. One example is if you are not gainfully employed at the onset of the illness and injury, and another is if you reduce working hours but do not fully cease gainful employment including paid leave such as sick leave.
For business owners
As a business owner, the business itself can own the income protection policy. This means claim proceeds flow directly to the business, which can then distribute funds accordingly — useful when the business needs to keep paying overheads and staff during your absence.
Your income for IP purposes is based on income after business expenses but before tax. Your operating expenses — rent, staff salaries, utilities, loan repayments — can be separately covered under Business Expense Insurance. Together, these two products form a comprehensive safety net for the self-employed.
WHAT COVER DELIVERS
Income Protection Benefits & Options
What income protection protects
Income protection can be held in your own name, inside your superannuation fund, or — for business owners — through the business itself. Each has different tax and cashflow implications.
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Your lifestyle. Keep meeting mortgage repayments, rent, groceries, and everyday expenses — without draining your savings.
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Your wealth. Eliminate or reduce the need to sell investments, downsize your home, or liquidate assets to survive.
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Your family's future. Keep school fees paid, protect your partner's career, and maintain stability for your children.
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Your recovery. Reduce financial stress so you can focus on getting better — not on unpaid bills. Financial anxiety slows recovery.
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Your retirement savings. Optional super contributions benefit keeps your nest egg growing even while you're off work.
THINGS TO PLAN AND BE AWARE OF
Risks, consequences and important considerations
These include:
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Paying premiums from your super will reduce your retirement balance unless you make additional contributions to offset them.
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Benefits are paid monthly in arrears. Your first payment arrives one month after your waiting period ends — factor this into your emergency reserves.
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Benefits are excluded for claims arising from war, acts of war, or self-inflicted acts.
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Always read the Product Disclosure Statement (PDS) carefully before selecting a policy — definitions of "unable to work" vary between insurers and occupation classes.
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Benefits may be offset by payments from workers' compensation, Centrelink, sick leave, or other legislative sources.
