What is income protection insurance, and how does it work?

1 min readLast updated January 31, 2024by Unbiased team

Income protection insurance offers working people financial security in times of unexpected disruptions.


  • Income protection insurance safeguards your income if you can't work for a covered reason. 

  • Loss of income is a major reason for foreclosures in the US. 

  • Income protection can give you peace of mind in the event of an unexpected medical issue, accident or any event that renders you incapable of earning an income.   

What is income protection insurance? 

Income protection insurance is a financial safeguard designed to substitute a portion of your income if you cannot work due to illness, injury, or disability. It ensures you have a consistent flow of funds should you find yourself in challenging times, helping to ease your financial strain. 

Situations where income protection insurance might be required include the following:  

  • Unexpected medical issues 

  • Accidents 

  • Any circumstances hindering your ability to work or earn an income. 

Like most insurances, income protection insurance acts as a safety net. It provides peace of mind by helping you meet your financial obligations, such as mortgages and bills, when your earning capacity is compromised. 

Income protection insurance can cover up to 85% of your pre-tax income for a period of time, so it’s well worth investigating to see if this is the right option for you. 

How does income protection insurance work? 

Income protection insurance provides the policyholder with a regular income or lump sum if they cannot work for covered reasons. Payouts replace a portion of the policyholder's lost income, ensuring they can meet essential financial commitments. 

For example, suppose you sustain an injury preventing you from working. You can then make a claim, and if it is approved, your income protection insurance will step in, offering monthly financial support during your recovery period. 

Several factors influence income protection insurance coverage and premiums, including: 

  • Age - Younger policyholders often secure lower premiums than older applicants. 

  • Occupation - The nature of a person's employment affects premiums and coverage; for example, those with high-risk jobs may face higher costs. 

  • Gender - Gender also impacts premiums, given the statistical differences in health risks. 

  • Medical history - A policyholder's medical history is a significant factor in determining premiums, especially if the person has pre-existing conditions. 

  • Lifestyle choices - Activities like smoking or engaging in high-risk activities, for example, skydiving or motorsport, can affect policy terms. 

  • Location - Policyholders living in areas with higher crime rates may pay higher premiums. 

Do I need income protection insurance? 

Determining if you need income protection insurance involves assessing your circumstances. Here are three things to consider: 

  1. Financial stability amidst uncertainty - If your income is fundamental for meeting financial obligations like mortgage payments or rent, bills, and daily expenses, income protection insurance provides a backup to cover these costs. It ensures you can maintain financial stability and fulfill financial responsibilities even during unexpected disruptions like illness or injury. 

  2. Supplementing employer coverage limitations - Even if you have disability coverage as an employee benefit, it may be limited or insufficient. Income protection insurance becomes essential to supplement such coverage, providing additional financial security. This is particularly crucial if your job involves higher risks or your employer's coverage needs to be more comprehensive. 

  3. Peace of mind of self-employed individuals - Self-employed people often have unique financial responsibilities, making income protection a valuable asset in their financial planning. This may be exacerbated because self-employed people often lack the safety net of sick leave or employer-sponsored disability insurance.  

In each instance, income protection insurance protects your income stream, allowing you to focus on recovering without the added stress of financial uncertainty. 

What does income protection insurance cover? 

Income protection insurance covers a range of situations that prevent you from working. Common claims include illness, injury, disability, and involuntary unemployment. 

  • Illness - If you're diagnosed with a disease that prevents you from working, income protection insurance can replace some of your income during your recovery period. 

  • Injury - In the event of an injury that hinders your ability to work, the insurance kicks in, offering financial assistance until you can return to your job. 

  • Disability - Whether temporary or permanent, a disability that prevents you from performing your occupation makes you eligible to claim benefits from your income protection insurance.  

  • Involuntary unemployment - Some policies cover involuntary unemployment, providing financial support if you lose your job through no fault of your own. 

What are the different types of income protection insurance? 

Income protection insurance is available in various policy types, offering different coverage and terms.  

Here is an overview of what each policy type offers: 

  • Short-term income protection - Provides coverage for a limited period (usually up to two years). It is ideal for short-term financial support during recovery. 

  • Long-term income protection - Offers coverage for an extended duration (usually until retirement). Suitable for sustained financial support for long-term illnesses or disabilities. 

  • Accident-only income protection - Only provides cover for injuries resulting from accidents. 

  • Own-occupation income protection - Protects you if you can't perform your current job. 

  • Any-occupation income protection - Protects you if you can't perform any job suited to your skills and training.  

Understanding these variations is crucial for helping you select a policy that aligns with your unique needs and provides the most comprehensive coverage based on your circumstances. 

Get expert financial advice  

Income protection insurance offers peace of mind in the event of an unforeseen event that prevents you from working.  

Depending on your coverage, you can claim as much as 85% of your pre-tax income to ensure that you can meet your financial obligations while you’re not able to work. 

To learn more about protecting your income, it’s best to consult an advisor for personalized financial advice.  

Seeking the guidance of a financial advisor will help you navigate the complexities of income protection insurance and ensure that you have a buffer that protects you and your loved ones if you cannot work. 

Connect with a financial advisor today 


Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.