Income Protection Insurance is sometimes disregarded by employees covered by Workers Compensation as there is a perception that Workers Compensation will provide sufficient benefits to cover unexpected disabilities – much to their peril! What are the differences between Workers Compensation and Income Protection?
What is Workers Compensation?
Workers Compensation is an employer funded scheme to provide benefits to workers who are injured whilst conducting their employment. Workers Compensation generally does not cover contractors, directors and some people working in certain business structures and the definition of an ‘employee’ or ‘worker’ eligible for Workers Compensation benefits varies from state to state.
Overall, the Workers Compensation scheme in Australia is somewhat complicated with; there are 11 different Workers Compensation schemes operating in Australia!1 In spite of the differences, Workers Compensation across all states can normally be split into 4 types of benefits payable to eligible employees;
- Income Replacement
- Permanent Impairment
- Death Benefits
- Medical Expense Reimbursement
The Workers Compensation payment rates and periods vary significantly between states as do legislated definitions of terms between states, like ‘income’ and ‘injury.’ For example, in Queensland overtime is included when calculating weekly payments but 85% of weekly earnings are paid on claim; in NSW overtime is not included in calculations but 100% of weekly earnings are paid. Regardless of the percentage of income replaced on workplace injury, the maximum weekly payment in Queensland for some workers is $1,263.20 and in Western Australia it is $2,156.60! Another example of the variation of payments is for medical expenses, where in Western Australia, a maximum of $57,210 is payable yet in most other states all reasonable medical expenses are covered.2
Fact: More than 700,000 people suffer workplace injuries annually. In 2003, of these 700,000 only 216,000 received Workers Compensation benefits.3
With the rise in workers, especially in the mining industry, working in different states to their residence, the level of protection offered under Workers Compensation can change when they cross state borders.
What is Income Protection?
Income Protection on the other hand generally provides 24 / 7 coverage for both sickness and accident; providing up to 75% (and in some cases higher) of gross remuneration including superannuation for the period of disability until either you return to work or the benefit period expires (anywhere between 6 months and age 70!). Unless specifically stated by an insurer at the time of underwriting or stated in the policy terms and conditions, Income Protection policies cover any medically diagnosed event (except self-harm and uncomplicated pregnancy) that prevents a person working in excess of the nominated waiting period.
Income Protection policy options can be customised to specific needs and additional options can be obtained to provide higher benefits where circumstances require; for example lump sum payments for serious illnesses (i.e. Heart Attack), automatic payments for specific injuries (i.e. Broken Bones) and additional payments to assist with home care where needed.
In addition, Income Protection policies are generally tax deductible, meaning obtaining coverage may also provide a taxation benefit!
Fact: More injuries are sustained at home (37%) and during periods of leisure (27%) than in the workplace (25%) with sporting injuries making up 11% of total injuries suffered by Australians.4
Workers Compensation vs Income Protection
Let’s look at some examples of how Workers Compensation and Income Protection can interact and how Income Protection can provide vital coverage in areas where Workers Compensation may not.
a) James, an office manager, aged 47, had a heart attack whilst driving to work that also caused a motor vehicle accident. He had 8 weeks off work and incurred $25,000 in medical related costs. As he was driving to work at the time, he thought he was covered by Workers Compensation and when he had recovered, contacted his employer to make a claim. He was informed that as the medical event was not considered a ‘workplace injury’ nor was his sickness caused by his workplace and no amount was payable.
b) Dylan, a plumber, aged 26, suffered a workplace injury that rendered him paralysed. Dylan had an Income Protection policy with benefits payable until age 65 and was covered under Workers Compensation. Workers Compensation paid him his full salary for 13 weeks and as he was permanently impaired paid him an additional lump sum of $178,000. Dylan incurred $53,000 in medical related costs and required mobility aids and renovations to his home to accommodate his impairment which used the majority of his Workers Compensation lump sum payment. Dylan contacted his Income Protection insurer and was deemed permanently disabled, with 75% of his full income being paid to him until he turned 65.
In Dylan’s case, if he was a contractor, it is likely that he would not have been eligible for any payments leaving him and his family financially exposed. Although Workers Compensation paid some benefits to him, if Dylan did not have his Income Protection policy, at the conclusion of the Workers Compensation claim, he may be left with no source of income and a vastly diminished capacity to generate an income.
Workers Compensation is free to me, what does Income Protection cost?
Income Protection should be a vital consideration for those not covered by Workers Compensation who need to protect their incomes and their future ability to generate an income. For those who are covered under Workers Compensation, Income Protection should be considered a supplement to existing Workers Compensation benefits, boosting benefits for workplace injuries and providing benefits for those injuries and illness not occurring in the workplace.
The additional coverage offered by Income Protection versus Workers Compensation does come at a cost. In most circumstances however this cost is lower than most think – in some circumstances, costing on average under 2% of a person’s income depending on the level of coverage obtained. Where cost and cash flow is an issue or other circumstances permit, Income Protection in Superannuation is also available.
Rather than ask should I take Income Protection when I am covered by Workers Compensation, a person should ask themselves, would I rather 100% of my income now and potentially 0% if I am injured or ill or would I like 98% of my income now to get 75% later!
Looking to obtain Life Insurance?
MoneyGeek wants to make sure our readers get easy to understand information to assist make the right financial decisions. Don’t be complacent with Workers Compensation; having the right income protection policy can protect your family and your pocket. MoneyGeek has teamed up with Keyperson Insurance to assist our readers find the right policy at the right price.
About the Author – The Money Geek
The Money Geek is the head money blogger for MoneyGeek.com.au. With over 8 years experience in the finance industry, the Money Geek provides information over a range of topics to help families Australia-wide improve their financial literacy to become their own geeks and take control of their financial future!
1,2 Safe Work Australia – Comparison of workers’ compensation arrangements in Australia and New Zealand, 2011–12
3,4 ABS, 2003 ‘Work related injuries’.