Differences between Workers’ Compensation & Income Protection

As a business owner and employer, you're juggling a lot of responsibilities — keeping your business operations running smoothly, supporting your team, and ensuring that everyone is protected if the unexpected happens. But when an illness or injury stops you from working, do you know which type of insurance can step in to help?

Workers’ compensation and income protection insurance might sound similar, but they each serve a unique purpose, and understanding how these two types of cover differ from each other can help you ensure you have appropriate cover in place.

In this guide, we’ll break down some of the key differences between workers’ compensation and income protection insurance, how they work, and why having both policies in place could offer valuable protection to you as a business owner.

What is income protection insurance?

Income protection insurance provides up to 70% (and up to a certain amount) of an employee’s or self-employed person’s income if they’re unable to work due to sickness or injury. This type of insurance offers broad coverage, including injuries or sicknesses that happen outside of work. Whether it’s a long-term condition or a temporary setback, income protection insurance can help with ongoing bills while you're recovering and unable to work, with most policies offering two or five years, or up to a specific age (such as 65).

For those who are self-employed, income protection can be a lifeline providing financial stability in the absence of employer benefits like paid sick leave or workers’ compensation. Since self-employed individuals don’t have employer-provided coverage, income protection insurance can be a smart option to minimise financial risks during periods of sickness or injury.

While workers’ compensation is designed for employees, it doesn’t provide any cover for self-employed workers’ or sole traders. This is where income protection insurance can step in, covering illnesses or injuries regardless of where they occur.

What are the benefits of income protection insurance?

One of the key benefits of income protection insurance is its flexibility. Unlike workers’ compensation, which only covers work-related incidents, income protection insurance can provide cover to you whether the injury happens at home, on holiday, or elsewhere.

Here are some key benefits and considerations:

• Coverage for non-work-related illnesses or injuries: Whether you’re injured at home or while travelling, income protection insurance can step in, providing potentially much-needed support.
• Monthly payments: Depending on your policy and the timeframe of the benefit, income protection insurance can cover up to a certain amount of your income, which can be between 70% and 90% depending on your policy.
• Long-term financial protection: Depending on the policy, income protection insurance can cover you for two years, five years, or even until a certain age, such as 65. You can choose the right cover based on your financial needs.
• Customised waiting periods: Many income protection insurance policies allow you to adjust the waiting period before you start receiving payments. The shorter the waiting period, the quicker the financial support — but this might mean higher premiums.
• Tax-deductible premiums: In many cases, the premiums you pay for income protection insurance can be tax deductible, which can help your overall budget long term.
• Pre-existing medical conditions: When you apply for income protection insurance with a pre-existing condition, there may be a few implications to your application depending how they affect your policy. Depending on the pre-existing condition, this may raise your premiums to cover the higher risk associated or could apply a waiting period.
• Policy exclusions: Depending on your provider, your policy may have different exclusions and may not provide appropriate cover for you, always consider the Product Disclosure Statement (PDS).

What is workers’ compensation?

Workers’ compensation can be a mandatory form of insurance that certain employers in Australia must have. It provides financial assistance to employees who are injured or become sick because of their job. This could be things from an accident at a construction site to long-term exposure to harmful substances.

In Australia, workers’ compensation is regulated by the workers’ compensation authority in each state and territory. This means that laws, benefits, and claims processes can vary depending on where your business is located. As an employer, you’re responsible for providing the right workers’ compensation cover for your employees according to the rules of your jurisdiction. These workers’ compensation schemes can differ significantly across the country — what applies in New South Wales may be different from the Australian Capital Territory or Western Australia.

Workers’ compensation can help ensure that employees who are injured at work get the financial support they need, whether through medical treatment or income replacement. Employers should also know their workers’ compensation regulator, as they are responsible for ensuring compliance with these systems in each region.

What are the benefits and considerations of workers’ compensation?

Although it may have more restrictions than income protection insurance, workers’ compensation is designed to provide comprehensive support for employees injured in the workplace. Here are some of its key factors:

• Medical coverage: workers’ compensation helps cover medical costs incurred as a result of the work-related injury or sickness. This could include hospital stays, treatments, surgeries, and rehabilitation services.
• Weekly payments for lost wages: workers’ compensation typically covers a portion of an employee’s wages, helping them meet financial obligations during their recovery. The exact percentage and benefit period vary by state and territory.
• Lump sum payments: For severe injuries or permanent impairments, workers’ compensation may provide a lump sum payment. This is particularly useful for employees who may not be able to return to work.
• Death benefits: If the worst happens and a worker dies from a work-related incident, workers’ compensation can offer a lump sum payment to the family. This may help cover funeral costs and ease the financial burden on surviving family members.
• Rehabilitation services: In case of an eligible claim, workers’ compensation offers rehabilitation programs to help employees recover and return to work as soon as possible, easing the transition back into their roles.
• Time sensitive: Most injuries need to be reported to the insurer within 48 hours. Your employer will need to make the initial notification to the insurer electronically, in writing or by phone. If you do not report the injury to your employer within five calendar days, you may pay a ‘claims excess payment’ which is equivalent to one week of the worker’s weekly compensation payments, or the claim may be denied.

As an employer, you’re responsible for managing workers’ compensation claims, ensuring that injured workers receive the right entitlements. It’s crucial to manage these claims efficiently to avoid legal issues and ensure compliance with local laws. Familiarising yourself with the workers’ compensation regulator and understanding how to manage workers’ compensation claims will help streamline the process.

Since workers’ compensation is regulated at the state and territory level, the benefits and time frames for receiving payments may differ depending on where your business operates. It’s important to stay informed about the specific workers’ compensation scheme in your area.

Here’s how you can stay up to date and get in touch with the workers’ compensation regulator in your state or territory:

• Australian Capital Territory
• New South Wales
• Northern Territory
• Queensland
• South Australia
• Tasmania
• Victoria
• Western Australia

Final word: Information about income protection insurance and workers’ compensation

Understanding the difference between income protection insurance and workers’ compensation can be key for those who want well-rounded support.

While workers’ compensation is mandatory for certain employers and covers work-related injuries, it doesn't protect employees outside the workplace. This is where income protection insurance can come in, offering coverage for accidents or sicknesses, outside the workplace.

For self-employed individuals, income protection insurance may be important — it may be a key tool for keeping your business afloat if you're unable to work. Having both types of cover may not only give you peace of mind, but may also mean that you’re protected in more situations.

Keep Reading: Learn how to compare income protection insurance policies like a pro.

For more information on how these policies can work together, or if you’re a self-employed business owner looking to find the right income protection insurance for your needs, request a quote and compare policies online today.