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Workers compensation vs. income protection: what’s the difference?
When you and your family are relying on your salary to keep things going, the thought of not being able to work due to illness or injury can be quite worrying. Fortunately, there are a number of types of cover available to ensure your loved ones are taken care of in case you’re not able to work.
It’s likely that you’ve heard of both workers compensation and income protection insurance and it’s true that both can be used to supplement lost income, however, there are some key differences between the two.
What's the difference between workers compensation and income protection?
While workers compensation provides cover for injuries or illnesses sustained in the workplace (for example trips or falls), income protection insurance will pay out if you are unable to work due to a non work-related illness or injury.
Workers compensation is usually part of your employment package, it’s mandatory for employers to provide it, and as the employee, you will not bear the cost of the cover. The terms of workers compensation typically involve a maximum length of cover (around 130 weeks) and since it is arranged by employers, it doesn’t usually apply to self-employed individuals or sole traders. There are a number of different types of insurance that can be categorised as workers comp - including life insurance in case of death, total permanent disability insurance, medical benefits and income replacement. Details of what level of workers compensation you are eligible for should be included in your contract upon starting a new role.
Income protection insurance, on the other hand, is something that individuals must invest in for themselves, and which covers lost income due to injury or illness sustained anywhere and at any time. Some people choose to purchase income protection in addition to other life insurance policies, such as critical illness, or total permanent disability, to ensure greater peace of mind.
What do workers compensation and income protection actually cover?
While both workers compensation and income protection insurances are designed to make up for income lost through injury or illness, the key difference is where you are covered. Income protection insurance can provide cover for an accident or illness sustained anywhere in the world and any time, as long as it meets the terms and conditions of the policy (for example, only certain policies will cover accidents incurred when playing sport, or participating in high-risk activities like skiing). Workers compensation will only cover you if you are injured or unwell at work, and you’ll need to provide proof of this to receive the payout.
When it comes to benefits, income protection insurance will usually provide monthly payments worth up to 75% of your typical income, with a maximum cap of usually $30,000 per month. How long you receive these payments will depend on your policy and how long you are out of work, and a waiting period will typically apply before you are eligible to receive any benefits. The length of the waiting period is often flexible, but a shorter waiting period is likely to be reflected in lower premiums.
Workers compensation policies differ according to a number of factors, including which state or territory you live in. Some will pay up to 90% of your usual salary to keep you and your family protected while you recover, but remember that the injury or illness that leads to your inability to work must have occurred at work itself. The benefit period for workers compensation is typically somewhere between 9 weeks and 13 months.
Why should you still consider income protection?
While you may already be covered by workers comp, supplementing this with income protection insurance can provide greater peace of mind, since it covers income lost due to accidents and illnesses sustained outside of work. Income protection policies are often more flexible and can accommodate a number of medical issues, including elective surgeries that would prevent you from working for a specific period.
Income protection insurance also provides a particular level of coverage - and peace of mind - to self-employed people or sole traders who will not receive any statutory income protection cover via their employer. There are premiums associated with income protection insurance, however these are generally tax deductible and vary depending on the level of cover you require to suit your needs.
- Is income protection insurance worth it?
- When is the best time to take out Income Protection Insurance
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AAMI Life Insurance products, other than in some circumstances the Redundancy Benefit, is provided by TAL Life Limited ABN 70 050 109 450 AFSL 237848 (TAL Life) which is part of the TAL Dai-ichi Life Australia Pty Limited ABN 97 150 070 483 group of companies (TAL). TAL is not part of the Suncorp Group. TAL uses the AAMI brand under licence from the Suncorp Group. Any advice on this page in connection with the Life products is general in nature and is provided by Platform Ventures Pty Ltd ABN 35 626 745 177 AFS Representative Number 001266101 (PV). PV is part of the Suncorp Group and an authorised representative of TAL Direct Pty Limited ABN 39 084 666 017 AFSL 243260 (TAL Direct). General advice does not take into account your individual needs, objectives or financial situation. Before you decide to buy or to continue to hold a Life Products you must read the relevant Product Disclosure Statement. The Target Market Determination (TMD) for the product is available on our website.