Worked Examples and Checklists
Income protection waiting period and benefit period: how to choose
Choose an income protection waiting period from your sick leave and savings, and a benefit period from the claims that hurt most, with worked arithmetic.
Choose the waiting period by asking how long you could cover your bills without the benefit, using sick leave, annual or long service leave and savings, and remember the first benefit is usually paid a month after the waiting period ends. Choose the benefit period by asking how you would cope with a long claim: a 2-year period covers most claims, but the claims that ruin finances are the long ones, which only a 5-year or to-age-65 period covers. A common pattern is a longer wait to keep the premium down and a long benefit period to protect against the worst case.
This guide is part of the worked examples section. Premiums are illustrative.
Step 1: Count your buffer
| Source | How to count it | Example (Ava, $8,000 a month gross) |
|---|---|---|
| Sick leave | Days available × daily pay | 20 days ≈ 1 month |
| Annual leave | Days you would be willing to use | 15 days ≈ 0.7 months |
| Long service leave | If accrued and accessible | None |
| Savings | Amount you could spend without hardship | $10,000 |
| Partner's income | Part of the household budget it can cover | Covers rent, not full costs |
| Employer salary continuance | Check your employment contract or fund | None |
Ava's monthly household shortfall without her pay is about $5,000 after her partner's income. Leave covers roughly 1.7 months, and savings cover another 2 months ($10,000 ÷ $5,000). Her buffer is about 3.7 months.
Step 2: Allow for payment in arrears
Income protection benefits usually accrue from the end of the waiting period and are paid monthly in arrears. With a 30-day wait, the first payment typically arrives around day 60. With a 90-day wait, around day 120.
| Waiting period | First payment, roughly | Buffer needed |
|---|---|---|
| 14 days | Day 45 | 1.5 months |
| 30 days | Day 60 | 2 months |
| 60 days | Day 90 | 3 months |
| 90 days | Day 120 | 4 months |
| 2 years | About 25 months | Long-term savings or other cover |
Ava's 3.7-month buffer comfortably covers a 60-day wait and almost covers a 90-day wait. Choosing 90 days and keeping a little more in savings is reasonable for her.
Step 3: Choose the benefit period
Think about the claims that would hurt most, not the most common ones.
| Benefit period | Covers | Good for | Watch out for |
|---|---|---|---|
| 2 years | Most injuries and many illnesses | Lower premium; cover in super often uses it | A serious illness or injury can outlast it, then income stops |
| 5 years | Longer recovery from major illness or surgery | A middle path | Still ends before retirement for most people |
| To age 65 | A lifetime loss of earning capacity | Main earners, mortgage holders, people in physical work | Highest premium; stricter work test after 2 years under new policies |
The arithmetic of a long claim
Illustrative: Ava has a back injury that keeps her out of work for 6 years from age 38. Income lost = 72 × $8,000 = $576,000.
- 2-year benefit, 90-day wait: benefit for 24 months × $5,600 = $134,400. Loss remaining = $441,600.
- 5-year benefit, 90-day wait: 60 × $5,600 = $336,000. Loss remaining = $240,000.
- To age 65, 90-day wait: 69 months (72 − 3) × $5,600 = $386,400. Loss remaining = $189,600.
The longer periods leave Ava $201,600 and $252,000 better off than the 2-year option. The premium difference over the years she holds the policy is usually a fraction of that, though she pays it whether or not she claims.
Step 4: Price the combinations
Ask for quotes on at least four combinations: 30 days/2 years, 90 days/2 years, 30 days/to 65 and 90 days/to 65. Then run two scenarios, a 6-month claim and a 5-year claim, in the income protection quote tool. See the worked example in how to compare quotes.
Use the after-tax premium: a $2,300 premium at a 32% rate costs $1,564 after the deduction. See the premium tax deduction calculator.
Combining super and retail cover
If your super fund provides income protection with a 60-day wait and 2-year benefit, you might hold a retail policy with a 2-year wait and benefit to 65 to start when the fund's cover ends. Long waiting periods make this kind of cover much cheaper. Check how each policy offsets the other: many policies reduce the benefit by other disability income so the total stays within the limit. See offsets.
Special cases
- Self-employed. No sick leave. Consider a shorter wait, or business expenses cover for fixed costs. Note that benefits are based on your income in the 12 months before the claim; see the 2021 changes.
- Casual workers. No paid leave. A 30-day wait may be needed. Check how casual income is calculated.
- High savings. A 90-day or longer wait can cut the premium substantially.
- Older workers. Benefit periods to 65 shorten naturally as you age; premiums rise.
Frequently asked questions
Can I change my waiting period later?
Lengthening the waiting period to reduce the premium is usually possible without new health questions. Shortening it usually needs underwriting.
Does the waiting period restart if I return to work briefly?
Many policies let you return to work for a short time during the waiting period without restarting it, within limits set in the PDS.
Is a 14-day wait worth it?
It costs much more and mainly covers short absences you could fund yourself. It suits people with no leave and no savings buffer.
Sources
- Moneysmart — income protection waiting and benefit periods
- Fair Work Ombudsman — paid sick and carer's leave entitlements
- ATO — deductions and tax on benefits
