Disclaimer – This article provides general education only and should not be relied upon for financial or legal advice. All policies have different wording and insurers apply them differently. If you are making or disputing an income protection claim, obtain personalised advice from an experienced financial adviser and/or insurance-claims solicitor.
Income protection insurance pays a regular monthly (or fortnightly) benefit if illness or injury prevents you from working. But the size of that benefit can be a surprise: most policies only cover a percentage of your pre-disability income, and many apply offsets for workers’ compensation, Centrelink, or employer sick leave.
This guide explains how benefits are calculated, what traps to avoid, and how to maximise your entitlements.
Key Terms You Need to Know
| Term | Plain English Meaning | Notes |
|---|---|---|
| Pre-disability income | The income used as a basis to calculate your benefit. | May be last 12 months’ income, or a 2–3 year average for self-employed or variable earners. |
| Indemnity policy | Benefit is based on actual income at claim time. | Common in superannuation policies; risky if your income has dropped. |
| Agreed value policy | Benefit is based on your income when the policy started. | Largely phased out since 2020 but some older policies remain in force. |
| Benefit percentage | The portion of pre-disability income that will be paid. | Usually 70–75%, rarely more. |
| Offsets | Reductions to your benefit due to other income (e.g. workers’ comp, Centrelink). | Ensures you do not exceed 100% of prior earnings. |
| Waiting period | Time you must be off work before benefits start. | Commonly 30, 60, or 90 days. |
| Benefit period | The maximum period you can receive benefits. | Typically 2 years, 5 years, or until age 65. |
Step 1: Calculate Pre-Disability Income
Policies define “pre-disability income” differently depending on your work type:
- Salaried employees: base salary plus overtime, allowances, and bonuses.
- Self-employed: net profit (not gross turnover).
- Casual/contract workers: averaged over 12–36 months to smooth fluctuations.
- Commission earners/bonuses: may be excluded unless paid regularly.
Tip: Always check the Product Disclosure Statement (PDS) — insurers apply their definitions strictly.
Step 2: Indemnity vs Agreed Value
| Policy Type | Principle | Caveat |
|---|---|---|
| Indemnity (most common) | Pays a % of income you’re earning at claim time. | Cheaper premiums, but payout falls if your income dropped before disability. |
| Agreed value (older style) | Pays a % of income you had when policy started. | More expensive; benefit is fixed even if your income later reduces. |
Example:
- Policy bought when income = $120,000.
- Income drops to $80,000 before claim.
- Indemnity: 75% × $80,000 = $60,000/year.
- Agreed Value: 75% × $120,000 = $90,000/year.
Step 3: Apply the Benefit Percentage
Most policies pay 70–75% of income.
Example:
- Monthly income = $8,000
- Cover = 75%
- Monthly benefit = $6,000
Step 4: Apply Offsets
Offsets are reductions applied when you are already receiving other benefits.
| Offset Source | Effect | Example |
|---|---|---|
| Workers’ compensation | Deducted from your income protection benefit. | $6,000 benefit – $2,000 workers’ comp = $4,000 paid. |
| Centrelink | Deducted in most policies. | Newstart/DSP payments reduce your monthly payout. |
| Employer sick leave | Some policies offset against sick leave, others don’t. | Check your policy wording. |
| Other insurance | Benefits coordinated so you don’t double-dip. | Salary continuance offsets against income protection. |
| TPD lump sum | Usually not offset. | Still, always check your PDS. |
Step 5: Apply the Waiting Period
You won’t be paid immediately. Waiting periods are:
- 30 days: faster but higher premiums.
- 60 days: mid-range.
- 90 days: cheaper but longer gap without income.
Tip: Plan how you’ll support yourself during the waiting period — with sick leave, savings, workers’ comp, or Centrelink.
Step 6: Understand the Benefit Period
Benefit periods define how long payments last if you remain unable to work.
| Benefit Period | Typical Use | Caveat |
|---|---|---|
| 2 years | Common in super funds. | Cover ends early if disability is long-term. |
| 5 years | Mid-range cover. | May still leave a gap until retirement. |
| To age 65 | Comprehensive cover. | Highest premiums. |
Tax Implications
Unlike TPD lump sums, income protection benefits are taxable.
- Taxed as regular income at your marginal rate.
- If paid through super, PAYG tax is deducted first.
- Always calculate your net after-tax income, not just the gross benefit.
Case Studies
Case 1: Office Worker with Default Super Cover
- Emma earns $90,000/year ($7,500/month).
- Super fund income protection covers 75% = $5,625/month.
- Waiting period = 60 days; benefit period = 2 years.
- Emma also receives $1,000/month Centrelink.
- Insurer offsets = $4,625/month.
Case 2: Self-Employed Builder
- Tom’s business averages $100,000/year net profit.
- Policy covers 70% = $5,833/month.
- Tom receives $3,000/month workers’ comp.
- Adjusted insurer payout = $2,833/month.
Case 3: Casual Retail Worker
- Frank averages $36,000/year ($3,000/month).
- Policy covers 75% = $2,250/month.
- No offsets → receives full amount.
Case 4: High-Income Professional
- Sophie earns $250,000/year ($20,833/month).
- Policy cap = $15,000/month.
- 75% of salary = $15,625 → capped payout = $15,000/month.
Fast-Track Checklist
| Action | Why It Matters | Evidence/Tool |
|---|---|---|
| Confirm income definition | Prevent surprises with averaging rules. | PDS policy wording. |
| Check for offsets | Ensure other benefits don’t reduce payout unexpectedly. | Workers’ comp/Centrelink statements. |
| Review benefit period | Avoid gaps if disability is long-term. | Policy schedule. |
| Confirm waiting period | Plan for income shortfalls before benefits start. | Policy schedule. |
| Calculate tax | Net income matters more than gross. | ATO calculator. |
Common Pitfalls
- Believing income protection = 100% salary.
- Forgetting offsets apply.
- Ignoring waiting periods.
- Relying on short benefit periods.
- Not keeping financial records (especially self-employed).
FAQs
How much will I get?
Usually 70–75% of pre-disability income.
Can I work part-time and still claim?
Sometimes, but your benefit will be reduced.
Is it taxable?
Yes, unlike TPD, income protection is taxed.
Can I claim both TPD and income protection?
Yes — they are separate, though benefits may be coordinated.
Will my super contributions continue?
Some policies include “super contribution benefits.” Check your PDS.
Income protection provides a crucial safety net, but benefits are not always straightforward. Payouts depend on:
- How your pre-disability income is defined.
- Whether your policy is indemnity or agreed value.
- The percentage covered (usually 70–75%).
- Waiting and benefit periods.
- Offsets and taxation.
Understanding your policy now means fewer surprises if you ever need to claim.
At TPD Claims Lawyers, we help Australians every day lodge and dispute income protection claims. If you’re unsure whether your benefit has been calculated fairly, contact us for a free, no-obligation assessment.
Last updated: 3 September 2025