Many are familiar with life insurance, in which you or your loved ones would receive a certain amount of money should you be incapacitated or if you were to pass away. However, less people are familiar with the idea of income protection. What is income protection insurance or income insurance and how does it work?

Income protection insurance will supplant your income if you are unable to earn an income yourself either because of illness or injury. Your insurance company in Australia will typically pay you up to 75% of your gross salary until you are able to work again or until the maximum benefit period has run out. You have three options for a benefit period: 2 years, 5 years, or until you reach the age of 65.

The fact is that most Australians do not have the savings or otherwise have the income stream to provide for themselves and/or their family should anything happen to them. So how do you make up for that? You and your family will need to pay rent or mortgage, you will need money for food, transportation, and other essential living expenses. The money has to come from somewhere, and that’s where income insurance comes in. The great thing about income protection insurance is that protects you regardless of where you are and what happens to you that impairs your ability to earn an income.

How much income protection do you need?

You can only get a maximum of 75% of your current salary in Australia whether you are employed or self-employed. If you earn above a certain income limit, you may have to be protected for a lower percentage by your income insurance company. It is also wise to budget that 75% of your income from your income protection in case the worst happens so that you know that you can continue living comfortably.

How much does income protection insurance cost?

That will depend on various factors, like your age, your salary, your gender, whether you have pre-existing health conditions, and whether you smoke or not.

It’s important to understand that income protection is not the same as worker’s compensation: if you are injured or fall ill outside of work, you will not be covered by worker’s compensation. Be sure to shop around with all the major income protection insurance companies in Australia. Find out what their premium rates are and read the fine print to see what you will and will not be covered for. Make sure you are making the most informed decision you can when purchasing income insurance. Think of income protection as insuring yourself and/or your loved ones for the future.