Income protection insurance is a policy that pays benefits to policyholders who become incapacitated due to an injury or illness and therefore cannot work. Besides the United States, it is common in the United Kingdom, Australia, Ireland, South Africa and New Zealand.

Basics of Income Protection Insurance

The policy offers three levels of coverage: own, suited, or any occupation income protection. The first kicks in when you cannot do the tasks of your own occupation, the second applies when you are unable to do your own job or a similar one for which you have experience and qualifications, and the third applies when you cannot do perform any type of work. Generally, own occupation offers the most coverage and tends to cost the most.

As for the payout, most policies tend to limit the payable benefit to approximately 70 percent of your gross income and even lower for those with higher incomes. Moreover, any benefit from the state may reduce the maximum benefit. However, some insurance companies encourage policyholders to resume work upon recovery by offering reduced benefits for taking up a part-time or lower-paying job. This is commonly known as a proportionate benefit.

Advantages of Income Protection Insurance

Income protection insurance has various advantages. The benefits are payable in the event of the policyholder’s incapacitation and after the deferred period has come to pass. In addition, payout may continue until the individual’s death, recovery, retirement or end of the term of the contract. Second, the benefits are tax-free. Next, as long as the policyholder continues to pay the premiums, the insurance company cannot refuse to renew the policy or cancel it. Finally, the option of a waiver of premium allows coverage to continue even when you cannot pay as long as you meet the specified e.

5 Types of Income Protection Insurance

  1. Disability insurance: This policy insures your income against the risk of a disability that renders you unable to work. It consists of various benefits, such as paid sick leave and short- and long-term disability benefits.
  2. Long-term disability insurance: This specific type pays out only once your short-term policy and other employment benefits end and continues for a stipulated period of time.
  3. Disability overhead insurance: It is also known as business overhead expense because it pays for those expenses in case you become disabled. The monthly amount is based on actual expenses, not estimated and anticipated profits. It is intended to cover rent, utilities, equipment maintenance, postage and stationary, and taxes on the business property, among others.
  4. Total permanent disability insurance: You can insure yourself against the risk of a permanent disability through a disability policy, workers' compensation, or as a part of a life insurance policy. A permanent disability is one that an individual cannot recover from. This can include the loss of both eyes, arms or legs as well as absenteeism from work due to an illness or injury that renders the individual unable to ever resume work.
  5. Workers' compensation: This type of insurance provides partial income compensation and covers medical expenses in case you become injured while working. In exchange, you must give up your right to sue your employer for negligence.

Eligibility for Income Protection Insurance

To enjoy the benefits of your policy, you must meet certain requirements. Regardless of the specific policy, they share common requirements, and you are not eligible to receive compensation for your income in the following cases:

  • If you become unemployed for any other reasons other than an illness or accident.
  • If you become ill or get into an accident due to drug or alcohol abuse, criminal acts, wars, and pregnancy.


Income protection insurance encompasses various policies meant to help individuals plan for unfortunate accidents that render them unable to work. It can be a worthwhile investment for many, especially those in high-risk occupations. Ultimately, the decision depends on your means, situation, and specific needs. It may be a waste for some, a lifesaver for others, but it does offer peace of mind regardless.