Most people with income protection think the hard work stops once the policy is active. It doesn't. The hard work is understanding what the policy actually pays — and what it leaves uncovered — when you stop earning.
Run your numbers through the Income Protection Gap Calculator first. Then come back here to understand what every variable actually means.
General information only. This article does not constitute financial advice. Insurance needs vary significantly between individuals. Consider speaking with a licensed financial adviser before making insurance decisions.
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Rates current as at 15 August 2026. All figures sourced from APRA, the ATO, ASIC MoneySmart, and Services Australia.
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What the income protection calculator actually measures
The calculator takes four inputs — your income, the benefit percentage you're covered for, your waiting period, and your benefit period — and shows you two things: the monthly gap between what you'd receive and what you actually need, and roughly how long your savings would hold out before that gap becomes a crisis.
Each input involves a choice. Get one wrong and you're not uninsured. You're underinsured. You pay premiums for years, something happens, and you find out the policy covers sixty cents in the dollar, not the dollar you were expecting.
This article walks through each variable so you can use the calculator with your eyes open.
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The 70% ceiling
No Australian income protection policy will pay more than 70% of your pre-disability income. This isn't a quirk. It's an industry-wide rule set by insurers and backed by APRA's oversight of the life insurance sector. The reasoning is simple: if a policy paid 100%, there'd be no incentive to return to work.
What this means in practice:
If you earn $120,000 a year (roughly $10,000 a month before tax), the absolute most any IP policy pays is $7,000 a month. Not $10,000. Not your take-home after tax. $7,000 — before the ATO takes its share, because IP benefits are assessable income.
After tax at your marginal rate, you might see $5,500 to $6,000 a month depending on your total income for the year. Use the Income Tax Calculator to work out your exact marginal rate and Medicare levy.
The gap between $10,000 and $5,500 every month is what the calculator is trying to surface. That gap doesn't close by itself.
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Super-held policies have different tax treatment
Many Australians hold income protection through their superannuation fund instead of as a standalone policy. The premium comes out of your super balance (no out-of-pocket cost), which is attractive — but the tax treatment on claims differs.
Benefits paid from a super-held IP policy are taxed as super income stream benefits, not ordinary income. The rates can differ from your marginal rate depending on your age and how your fund splits between preserved and taxable components. ASIC MoneySmart's income protection guidance and the ATO's income stream tax tables are the authoritative references.
The key point: the calculator's output changes based on how your policy is held. Use the correct tax rate for your situation.
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The waiting period: your savings buffer in disguise
The waiting period — also called the excess or deferred period — is the gap between when you stop working and when the policy starts paying. Common options are 14 days, 30 days, 60 days, 90 days, and 2 years.
A longer waiting period means lower premiums. It also means you're self-insuring for longer. Those two facts are the same fact.
A 90-day waiting period on a $7,000 monthly benefit means you need to cover $21,000 of living costs from savings, sick leave, annual leave, and any Centrelink entitlements before a single dollar arrives. If your emergency fund covers three months of expenses — a common rule of thumb — a 90-day wait exhausts it entirely before your cover kicks in.
How to calibrate the waiting period:
Work out how many months of essential expenses (mortgage or rent, groceries, utilities, minimum debt repayments) you can cover from:
- Accrued sick leave (most full-time employees accrue 10 days per year)
- Accrued annual leave
- Your accessible emergency savings — not super, not locked-away term deposits, not offset funds you'd hesitate to draw
Add them up in months. That's your real waiting-period capacity. A 90-day wait leaves you exposed for one month before the policy kicks in. A five-month buffer means a 90-day wait is comfortable and keeps the premium lower.
The Financial Health Check helps you map your liquid savings against your monthly obligations.
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The benefit period: where most policies quietly fall short
The benefit period is how long the policy pays for a single claim. Options typically range from 2 years, to 5 years, to age 65 (or age 70 on some policies).
This is where policies differ most — and where premiums differ most. A 2-year benefit period costs meaningfully less than a to-age-65 benefit. It's also a very different product.
A 2-year benefit period actually covers this: if you're injured at 42 and can't work in your occupation, you receive 24 months of benefits and then nothing. If the condition is permanent, you're uninsured from month 25 onwards. Your savings must carry you until you can return to work or reach preservation age (currently 60 for most people born after June 1964).
A to-age-65 benefit period covers the full duration of permanent disability — your income stays protected through to retirement, not just the first two years.
The premium difference is real. The calculator shows you the benefit in both scenarios. Whether that premium difference is worth it depends on your occupation, savings outside super, mortgage position, and personal risk tolerance. Those are your calls to make.
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Agreed value versus indemnity: a distinction worth knowing
Older policies locked in the benefit amount at inception, regardless of what you earned at claim time. If your income had fallen by then, you still received the agreed amount.
APRA removed agreed-value income protection from sale in April 2020. Policies issued since then are indemnity-based: the benefit is calculated against your income at claim time (or in the 12 months before it, depending on the insurer). If your income has dropped — perhaps you moved from full-time to part-time, or your business had a lean year — your benefit reflects that lower income, not what you earned when you bought the policy.
If you hold a pre-April 2020 agreed-value policy, you hold something that's no longer available new. That matters if you're thinking about switching or consolidating cover.
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Indemnity policies and self-employed Australians
Self-employed Australians, contractors, and business owners face particular exposure here. Income swings year to year. An indemnity policy uses your recent earnings as the benchmark — if you claim in a low-income year, your benefit may be materially lower than in a typical year.
Some insurers let you choose whether they use the 12 months before the claim or the best 12 months from the previous three years. Check the product disclosure statement (PDS) for any policy you hold or consider.
Use the Income Tax Calculator to confirm your assessable income if you're working through what a policy would likely pay.
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A worked example
Sam is 38, earns $95,000 a year as a project manager ($7,917 a month before tax), and is a permanent employee with four weeks of annual leave and six weeks of sick leave accrued.
Monthly essential expenses (mortgage, food, utilities, insurance, minimum debt repayments): $4,800.
70% cap: the maximum IP benefit is $5,542 a month (70% of $7,917).
After tax: at Sam's marginal rate and Medicare levy, that's roughly $4,600 to $4,800 a month depending on total income for the year — roughly covering Sam's essentials, but with no buffer for unexpected costs, car repairs, school fees, or discretionary spending.
Waiting period: Sam has ten weeks of leave accrued — roughly 2.5 months. A 90-day waiting period lines up closely with that buffer. A 30-day wait would cost more in premiums and isn't necessary.
Benefit period: Sam has a mortgage with 22 years remaining. A 2-year benefit covers short-term injury or illness but leaves Sam exposed if the condition is permanent. A to-age-65 benefit covers the full mortgage term and through to retirement.
This is what the calculator is designed to make visible — not make the choice for you, but make it clear.
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What the calculator cannot tell you
The calculator shows you numbers. It cannot tell you:
- Whether a policy actually covers your occupation class ("blue-collar" attracts different conditions and premiums than "white-collar" — check the PDS)
- Whether the definition of disability is "own occupation" (you can't do your specific job) or "any occupation" (you can't do any job you're reasonably suited for) — this matters enormously at claim time
- Whether exclusions apply to pre-existing conditions, mental health claims, or other factors relevant to your history
- The exact premium for your age, health, occupation, smoking status, and benefit structure
For those details, a product disclosure statement and a licensed financial adviser are the right tools. The calculator's job is to make sure you walk into that conversation knowing your number: your gap, your buffer, and what benefit period your mortgage requires.
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FAQ
Is income protection insurance tax-deductible in Australia?
Premiums on a personally-held income protection policy are generally tax-deductible against your assessable income. Premiums paid through superannuation are not deductible. Benefits received are assessable income in the year you receive them. The ATO's guidance on personal super contributions and insurance inside super covers the details — or use the Income Tax Calculator to see how a deduction at your marginal rate affects your net premium cost.
How is the benefit amount calculated if I'm self-employed?
Most indemnity insurers look at your income in the 12 months before the claim, or sometimes the best 12 months from the previous three years. Income for this purpose is your net business income — revenue after business expenses, as reported to the ATO — not gross turnover. Check your PDS for the specific definition. This is why keeping your tax returns current matters: a claim supported by recent, accurate ATO assessments is cleaner to process.
What happens to my income protection if I take parental leave or reduce my hours?
Most indemnity policies let you reduce your cover if your income drops, but reinstating reduced cover may require fresh underwriting — health questions and potential new exclusions. Notify your insurer if your income changes materially. Some policies pause cover during parental leave without losing original terms; this varies by insurer and product. Read your PDS or contact your insurer before making changes.
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This article provides general information only and does not constitute financial product advice. Income protection insurance is a financial product — before purchasing or changing any insurance, consider whether it is appropriate for your personal circumstances. ASIC MoneySmart (moneysmart.gov.au) is a free, independent government resource for comparing insurance products.