How much does Income protection insurance cost in Australia?

At a glance

• Income protection premiums are based on factors like age, occupation, income, health status, and policy features.
• Most policies cover 70%–85% of your income, with average costs ranging from 1% to 3% of annual earnings.
• Optional extras like TPD or trauma cover can increase premiums by 10%–20%.
• Comparing quotes and adjusting waiting or benefit periods can help manage costs effectively.

 

 

Income protection insurance is a financial safety net against the temporary loss of income due to injury or illness. In Australia, it replaces a portion of your income when you’re unable to work, helping you cover expenses during recovery and providing short-term financial stability.

Understanding how insurance providers price income protection insurance enables you to effectively plan your finances and select the coverage that best suits your needs. Insurers assess factors such as age, gender, occupation, lifestyle, and policy features to determine premiums. Each factor reflects a level of risk, and additional features can further affect the cost. 

In the sections below, we explore the average cost of income protection insurance in Australia, how it’s calculated, and the factors that affect the premium, helping you make an informed decision.

 

 

Factors Influencing Income Protection Premium

 

Various factors influence premiums for income protection insurance. Here are some key factors that impact the calculation of premium rates:

• Age: As you get older, the risk of developing health conditions increases, resulting in higher premiums.
• Occupation: High-risk occupations involving manual labour or hazardous conditions have higher premiums due to the increased likelihood of work-related injuries or illnesses. Conversely, low-risk occupations may have lower premiums.
• Income: Insurers calculate premiums based on a percentage of your income, meaning that higher earners pay more to receive a proportionally larger benefit.
• Health and Lifestyle: Insurance providers may consider factors such as your medical history, body mass index (BMI), lifestyle, and participation in risky activities. 
• Smoking Status: Smoking is a significant health risk, so smokers generally face higher premiums compared to non-smokers. 
• Pre-existing Medical Conditions: If you have a pre-existing medical condition, it may affect the premium amount or result in exclusions for certain situations. Insurance providers often conduct medical underwriting to assess the level of risk associated with your condition.
• Waiting Period: The longer you wait before making a claim, the cheaper your premiums will be. 
• Benefit Period: Longer benefit periods result in higher premiums.

 

 

How Is My Monthly Premium Calculated?

 

Understanding how your monthly premium is calculated is crucial when it comes to income protection insurance. Let’s delve into the details and explore the calculation process with examples.

 

Step 1: Determine Your Monthly Income

 

Insurers base your premium on the income you earn before tax. This includes your salary, wages, or earnings from self-employment.

Let’s say you earn $100,000 per year, which equals $8,333 per month.

 

Step 2: Choose the Insured Income Percentage

 

Most income protection policies cover up to 70%–85% of your pre-tax monthly income. This is known as your insured benefit, the amount you’d receive if you’re unable to work.

If your policy covers 75% of your income: $8,333 × 75% = $6,250 monthly benefit

This insured benefit becomes the basis for calculating your premium.

 

Step 3: Apply the Risk Rate (Based on Your Profile)

 

Once you know your monthly insured benefit, insurers apply a risk rate to determine your premium.

The risk rate is a percentage applied to your insured benefit, reflecting your personal risk. Insurers set this rate based on factors like:

• Your age
• Occupation risk level
• Smoking status
• Medical history

Rates typically range from 1% to 3% of your annual insured benefit.

Example:

Annual insured benefit = $6,250 × 12 = $75,000

Risk rate = 2%

$75,000 × 2% = $1,500 per year. This is the annual premium or the amount you pay each year to keep your income protection policy active.

 

Step 4: Calculate Monthly Premium

 

Now, divide your annual premium by 12 to get your monthly cost.

$1,500 ÷ 12 = $125/month

That’s your base premium (with a 90-day waiting period) before adding any optional extras.

 

Step 5: Adjust for Policy Options

 

Your final premium depends on the policy settings you choose. A longer waiting period (e.g., 90 days) lowers your premium, while a shorter waiting period (e.g., 14 or 30 days) increases it by around 10% – 15%. 

 

If You Choose a 30-day Waiting Period, the premium increases by 10%:

• $1,500 × 10% = $150 extra
• New premium = $1,500 + $150 = $1,650 per year or $137.50 per month.

 

If You Choose a 14-day Waiting Period, the premium increases by 15%:

• $1,500 × 15% = $225 extra
• New premium = $1,500 + $225 = $1,725 per year or $143.75 per month.

Similarly, a short benefit period (e.g. 6 months) costs less, while choosing a longer benefit period (e.g. 5 years) can raise your premium by 20% or more. Adding extras like TPD or trauma cover will also increase your premium, typically by 10%–20%.

 

 

Average Cost of Income Protection Insurance in Australia

 

Understanding the average cost of income protection insurance can help you compare the quotes you’ve received against typical market rates and make more informed decisions. 

Below are two tables: the first outlines an illustrative example based on a specific profile, while the second presents industry averages based on data from Finder. 

These examples highlight how job type and personal profile affect premiums.

 

Table 1: Income Protection Cost Breakdown for a 40-Year-Old Software Engineer

Factor	Details
Age	40
Income	$100,000 per year
Occupation	Software Engineer (low-risk)
Health Status	Non-smoker, no pre-existing conditions
Insured Income (75%)	$6,250/month
Waiting Period	90 days
Benefit Period	2 years
Estimated Annual Premium	$1,200 – $2,000
Estimated Monthly Premium	$100 – $165
Impact of TPD/Trauma Add-ons	May increase premium by 10% – 20%

 

Note: Keep in mind that these figures are for illustrative purposes only and may not reflect current market rates. It’s always wise to obtain personalised quotes from insurance providers for accurate cost estimates.

Aspect Underwriting lets you get a quick quote online by filling out a simple form in under 10 minutes.

 

Table 2: Average Income Protection Insurance Costs in Australia (based on Finder survey)

Profile	Monthly Benefit	Waiting Period (Days)	Avg. Monthly Premium
30‑y/o non‑smoking male	$4,000	90	$57.50
30‑y/o non‑smoking female	$4,000	90	$82.46
30‑y/o non‑smoking male office worker	$4,000	90	$53.96
30‑y/o non‑smoking male construction worker	$4,000	90	$86.14

The above data from Finder shows how monthly premiums vary by age, gender, and occupation.

 

Note: Income protection insurance policies may also include additional costs and exclusions. It’s important to read the Product Disclosure Statement (PDS) carefully before purchasing a policy to fully understand what is and isn’t covered.

 

 

Policy Features That Affect Income Protection Premium

 

Beyond personal factors, specific policy options can significantly influence what you pay as your premium.

 

Stepped vs. Level Premiums

 

Income protection policies often come with options such as stepped premiums and level premiums. Stepped premiums start lower but increase over time with age, whereas level premiums remain constant throughout the policy term. 

Additionally, you might have the choice to add extra benefits or features to your policy, such as total and permanent disability (TPD) cover or trauma cover. These additional options can impact your premium amount.

 

Inflation Protection and Indexation

 

It’s crucial to consider whether your income protection policy includes inflation protection or indexation. These features ensure that your benefit amount keeps pace with inflation over time. 

While these options provide valuable protection against the eroding effects of inflation, they may result in higher premiums due to the increased coverage provided.

 

Exclusions and Limitations

 

Income protection policies often have certain exclusions and limitations. These factors can affect the premium amount and the extent of coverage provided.

Exclusions refer to specific conditions or circumstances not covered by the policy. Common examples include:

• Pre-existing medical conditions (unless disclosed and accepted)
• Self-inflicted injuries
• Illnesses resulting from drug or alcohol abuse
• Injuries sustained during criminal activity or dangerous hobbies (e.g., skydiving)

Limitations, on the other hand, may place caps or conditions on your benefit payments. For instance:

• A policy might limit coverage for mental health conditions to 12 months.
• Payments may be capped at a certain amount, regardless of your insured income.
• Some policies may exclude coverage during overseas travel or relocation.

Always review the policy documents to understand exclusions and limitations. 

 

Policy Renewal and Adjustments Over Time

 

Income protection policies are typically renewable annually or at specific intervals. During the renewal process, the insurer may adjust your premium based on various factors, including your age, occupation, or the insurer’s overall claims experience. It’s important to be aware that your premium may change at each renewal period.

 

Income protection insurance helps you stay financially secure if illness or injury prevents you from working. With so many factors influencing cost,  from your age and occupation to benefit periods and waiting times, it’s important to choose a policy that fits both your needs and budget.

If you’re not yet covered and the idea of losing your income concerns you, now is the time to explore your options.

Get a quote or Contact Aspect Underwriting today and protect your income with confidence.