The Payout Process for Income Protection Insurance

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What is income protection insurance?

When can I make an income protection claim?

How do I make an income protection claim?

How do income protection claims and payouts work?

Will I need to pay tax on any income protection payouts?

What can I do if my income protection claim is denied?

Where can I find and compare life insurance?

Long story short

If you submit an income protection claim, you will likely need to show evidence of your condition

This helps your insurer check you meet your policy’s definitions for a payout.

Your income protection policy may list a waiting period before any payouts start

If you recover before the waiting period is up, you won’t receive any benefit payments.

Payouts stop when you can return to work or the benefit period is up

Whichever happens first is the one that will apply.

What is income protection insurance?

Income protection insurance is a type of life insurance. If an injury or illness means you can’t work for a time, income protection could mean you still have money coming in to pay your bills and cover necessities while you recover. The industry refers to these funds as ‘benefits,’ but sometimes people simply call them ‘payouts.’ 

When can I make an income protection claim?

If you’d like to make an income protection claim and for it to be accepted, you’ll need to meet your policy’s definition for a partial or total disability, along with the disablement lasting beyond your policy’s waiting period. How your insurer defines a partial or total disability will be in your product disclosure statement (PDS).  

As part of this definition, you may need to be unable to work in your own (or a similar) occupation or any occupation. There may also be exclusions listed, like if your injury or illness has come about from an uncomplicated pregnancy or in the first six months after a voluntary elective surgery. 

In fact, of the fewer than 5% of income protection claims declined in the second half of 2024,¹Australian Prudential Regulation Authority –  Life insurance claims and disputes data December 2024 it was usually due to the claim failing to meet the definition or because exclusions were involved. With that in mind, its always a good idea to read over your PDS to avoid similar disappointment. 

Importantly, income protection policies come with waiting periods. Choosing a waiting period, usually from a selection of options, is a step in taking out income protection insurance. If you can return to work before the waiting period is over, you won’t receive a payout. So, before you start the paperwork for a claim on your income protection insurance, you may want to double-check how long your waiting period is. It’s possible you might meet the policy definitions for disablement but recover before that waiting period is up.   

How do I make an income protection claim?

Making a claim is the first step of the income protection payout process. To do so, you’ll need to reach out to whomever sold you the policy. For instance, your policy may be through your superannuation fund, or you may have bought it directly from an insurer. However the deal was made, you’ll need get in touch to let them know you’d like to make a claim. 

From there, your insurer has 10 business days to respond. Their response should explain your cover, including any benefits and waiting periods, as well as the claims process to follow. 

This process may vary a little between insurers, but you’ll likely need to back up your claim with evidence. Depending on your circumstances, this could include medical reports and test results; information about your work duties, hours, and any physical requirements; and evidence of your income, like payslips, tax returns, and financial statements. 

As part of the process, you may also have to fill out a claim form. 

How do income protection claims and payouts work?

The insurer assesses your claim

Once your claim’s sent off, along with any requested information or evidence, it’s your insurer’s turn to take the helm. They’ll use the information you provided to assess your claim. Sometimes, they might ask you to have an independent medical examination to help them make their final decision.  

There’s no guarantee on exactly how long the claim process will be. However, more complex claims with lots of information to review are likely to take longer. In July–December 2024, the estimated average income protection claim processing time was 1.5 months.²Australian Prudential Regulation Authority –  Life insurance claims and disputes data December 2024

Getting any requested information to your insurer quickly could help to minimise delays. This is because the Life Insurance Code of Practice³For more information, see Council of Australian Life Insurers – Life Insurance Code of Practice specifies that your insurer should tell you their decision within 15 business days of receiving all the requested information from you and finishing their own enquiries, like speaking with your doctor.  

FYI: They need to let you know what they’ve decided in writing, so you might want to keep an eye on your email inbox or for a letter in the post. 

You receive monthly payouts

If your claim is successful and your waiting period is up, you’ll begin to receive regular payouts of a set percentage of your monthly pre-tax salary. For instance, your policy might specify payouts equal to 65% of your monthly pre-tax salary. 

Something you might want to note is the aforementioned salary is your current one, not the one you had when you first bought the policy – at least if you have an indemnity value policy, rather than the phased-out agreed value style. If you’ve climbed a few rungs of the career ladder, this kind of consistency can be a positive development; less so if your salary has headed in the other direction. Checking your coverage amount and benefit period when you change jobs or get a promotion could be a smart move. 

These payments are made in arrears – after each month has passed, rather than beforehand. You’ll continue to receive them until either you’re fit to work again, or your benefit period is over – whichever comes first. Your benefit period may be a set length of time, like two years, or until you reach a particular age, like 65. 

The insurer reconfirms your continued eligibility

In some circumstances, your insurer may check in on your recovery progress. You might need to be reassessed by a medical professional for your payouts to continue.  

Similarly, the definitions of your policy may change once you’ve been receiving payouts for a while. For instance, to be eligible for further payouts, you may need to be unable to work in any occupation, rather than just your own. 

Will I need to pay tax on any income protection payouts?

If you prefer to avoid strongly worded letters from the Australian Taxation Office, you might like to know that you’re expected to declare any payments you receive for lost salary or wages – and that includes income protection payouts. You’ll also likely have to pay tax on those income protection payouts. 

Conveniently, tax may have already been withheld on your payouts in some instances. However, if you bought your policy directly from the insurer, this is unlikely to be the case.⁴This is general information only, and it’s not intended to provide or be relied on for tax, legal, or accounting advice. You should always consult with a qualified tax professional or advisor regarding your specific situation before making any tax-related decisions. 

Helpful tip

Although you may need to pay tax on your income protection payouts, you may also be able to claim the premiums for your cover as tax deductions. However, that only applies to income protection insurance that isn’t held through your super. Its always worth speaking with a tax professional to determine if you can claim these as a deduction on your tax return. 

Adrian Bennett

General Manager for General Insurance

What can I do if my income protection claim is denied?

As we mentioned earlier, fewer than 5% of income protection claims were denied in the latter part of 2024.⁵This is general information only, and it’s not intended to provide or be relied on for tax, legal, or accounting advice. However, if your claim ends up in this pile, it isn’t necessarily the end for your claim. 

For starters, your insurer must explain the reasons for their decision when they notified you in writing. However, you can also ask your insurer to provide the documents and information they used to reach that decision. Going through these files might help you understand why your claim was denied. Alternatively, you might feel your insurer missed something. At this point, you could ask them to review their decision. 

If you’re still unhappy with the outcome, you can escalate your complaint by speaking to the Australian Financial Complaints Authority.⁶For more information, see Australian Financial Complaints Authority – Make a complaint They provide free and independent dispute resolution services which can review and potentially help reverse the claim decision or help you get to grips with why the insurer denied your claim. 

Where can I find and compare life insurance?

Before you can receive any income protection payouts, you’ll need an income protection policy. But when you’re busy with work and the demands of everyday life, it can be hard to find the time to look out for more than your immediate future. That’s why iSelect is here to help. You can use our online comparison tool to easily and quickly review a range of income protection insurance policies from select providers side by side.