Life insurance vs income protection insurance

Both life insurance and income protection protect you in different ways, so what you need will depend on your circumstances.

If you have a family or someone who depends on you, life insurers can pay them a lump sum when you die. But if you work and rely on your income to pay the bills, you also need to think about income protection insurance, which can pay you a monthly benefit if you get sick or are injured.

Main differences between life insurance and income protection

Here's what both do in a nutshell:

• Life cover pays a lump sum to your partner or family members (your nominated beneficiaries) if you die or are diagnosed with a terminal illness.
• Income protection pays you a monthly benefit worth up to 75% of your salary if you are temporarily unable to work because of an illness or injury.

To give you a better idea of how they differ, here's a breakdown of the main differences between life insurance and income protection.

	Life insurance	Income protection
How do they pay you?	In one lump sum	In monthly instalments, similar to your income
When does it pay out?	If you die or become terminally ill	If you become sick or injured and aren't fit to work
How much does it pay out?	You choose the amount when you purchase a policy	75% of your monthly income
What can it pay for?	Debts, mortgage payments, living expenses for your family and more	Everyday expenses and bills, similar to your income
What's the cover expiry age?	You can usually hold a policy until the age of 99	Policies can usually be held to the age of 65, but some will allow an extension of cover to age 70
Is there a disability benefit?	As an additional option that provides you with a lump sum if the person becomes totally and permanently disabled	Yes, it usually comes as a built-in benefit that provides you with an ongoing benefit if you are unable to work due to total or partial disablement
Maximum entry age	Generally about 75 (Some insurers offer cover up to 80)	Generally about 64

Which one do I need?

Ideally, you could have both because life insurance and income insurance protect you for different situations. Understandably though, you might be reluctant to pay for two policies, so ask yourself this: does anyone depend on you?

Get a life insurance or income protection quote

Should I get life insurance and income protection combined?

If you work full-time, have a family or someone who depends on you and you want peace of mind, you should consider getting combined life insurance and income protection or getting two separate policies. Here's an example of what this could look like:

Daniel, a 42-year-old sales manager, was married with three children. He took out a life insurance policy and income protection policy with the following benefits:

• A life insurance benefit of $1,000,000
• An income monthly benefit of $4,000.

Daniel was suddenly diagnosed with lung cancer, which forced him to stop work and receive treatment for two years. Because he had income protection, he was able to continue to pay the bills once he'd served the waiting period. This included mortgage repayments, school fees, utilities, food and other everyday expenses.

When Daniel passed away, their life insurance policy paid out the $1,000,000 benefit to his family, allowing Daniel's partner to pay off the mortgage, credit card debt and pay for other everyday living expenses.

Compare income protection or life insurance from these brands

Compare provider features in the table below and click through to get a quote. You can typically get a combined policy when you head to the provider's website.

• Life insurance
• Income protection

Speak to an insurance specialist to help you find personalised cover

Finder Score - Life Insurance

Life Insurance is a little complicated and a lot overwhelming. That's why we made the Finder Score, to make it easier to compare Life Insurance products against each other. Our experts analysed over 30 products and gave each one a score between 1 and 10.

But a higher score doesn't always mean a product is better for you. Your situation is unique, so your policy choice will be too. Don't think of Finder Score as the final word, but as a good place to start your life insurance comparison.

Read full Finder Score methodology

Common questions people ask when considering life insurance and income protection in Australia

• But I already have life insurance inside my super?

  Most Australian superannuation funds will offer a default level of life cover to their members, which is usually around $100,000 to $200,000. For the average family, this isn't nearly enough.

  Standalone policies will usually offer a more comprehensive level of cover as they can be tailored towards you and your family's specific financial needs. If you don't want to cancel life insurance inside your super, it's probably worth using a supplement alongside a more comprehensive standalone policy.

• Why do I need income protection when I have workers compensation insurance?

  Workers compensation insurance will only provide cover for work-related illness and injuries. Income protection can cover you for any illnesses or injuries. The following are a couple of other reasons to get income protection:

  • Reduced benefit period for workers compensation of about 13 weeks to 9 years depending on the claim. Income protection can continue to provide cover till age 65.
  • Benefit amounts and benefit periods for workers compensation vary significantly between states. This is not the case for income protection insurance.

• If I am a stay-at-home parent, do I still need life insurance?

  Just because you're not the main income-earner of the family, doesn't mean your loss wouldn't have a significant financial impact. The costs of covering domestic duties are extensive. Without you, your partner will need to cover the costs of childcare, cooking, transport, cleaning and maintenance, which can run into the hundreds if not thousands of dollars each week.

• My income protection insurance features a death benefit, should I still consider a life insurance policy?

  Most income protection policies will offer a basic death benefit as a built-in feature on the policy. While this is a nice bonus to compare across different policies, the lump-sum payment may not be enough to cover all financial obligations in the event of death.

  Below is an example of what will be provided under the OnePath Income Secure Cover plan at the time of writing.

  • Basic death benefit built-in feature: If the insured dies or is diagnosed with a terminal illness, OnePath will pay a one-off lump-sum payment of three times the monthly amount insured to a maximum of $60,000. This amount will be paid in addition to any other benefits that the policy owner is entitled to.
  • Enhanced death benefit (only available on the comprehensive and professional plan): Under the enhanced death benefit, OnePath will pay a lump-sum payment equal up to six times the monthly benefit to a maximum of $60,000. This will be paid in addition to any other benefits that the policy owner is entitled to.

• Do I need both life insurance and income protection?

  Life insurance and income protection cover different needs, so having both can offer more comprehensive protection. Life insurance pays a lump sum to your beneficiaries if you pass away, ensuring their financial security. On the other hand, income protection provides a monthly income if you cannot work due to illness or injury, helping you cover everyday expenses. If you have dependents and rely on your income to support them, both policies could be essential.

• What are the disadvantages of claiming income protection through superannuation?

  Claiming income protection through superannuation can have some drawbacks. First, benefits might be taxed as regular income, reducing the amount you receive. Second, the policy might have stricter conditions or limited coverage, as superannuation funds often offer basic cover. Additionally, any claims might reduce your retirement savings, affecting your future financial security.

• How much should I be paying for income protection?

  The cost of income protection typically ranges from 1% to 3% of your annual income, depending on factors like your age, occupation, health and the level of cover you choose. Opting for a longer waiting period or a shorter benefit period can lower your premiums. You can use our income protection calculator to estimate the cost of cover based on your specific situation. It is important to find a balance between affordability and sufficient coverage.

• Is it worth having income protection?

  Income protection is often worth it if you rely on your income to meet financial obligations, such as mortgage payments or living expenses, or if you have a family that relies on your income. It provides peace of mind by ensuring you have a steady income if you are unable to work due to illness or injury. While premiums may seem high, the financial security it offers can outweigh the cost.