Jess fell down the staircase in her apartment last month. A badly broken ankle, surgery, complications in recovery, and at least two months off work.

She is 30, and she works two jobs. Her main one is as a learning support assistant at a primary school, around 30 hours a week, paying $1,760. One night a week she works as a disability support provider, for another $600. Together, $2,360 a week.

Here is the part most people get wrong. Because Jess was at home when it happened, workers compensation does nothing for her.

Jess is an illustration, not a client. The numbers are used to show how the cover works.

The assumption that catches people out

Ask most working Australians what would happen if they were injured and couldn’t work, and workers compensation comes up quickly. It feels like the safety net.

The trouble is that it only catches you if you fall at work, and most people don’t.

Safe Work Australia reports that just 3.5% of working people experienced a work-related injury or illness in the previous 12 months. The Australian Institute of Health and Welfare finds that most injuries happen at home or while playing sport. And according to the Financial Services Council, most income protection claims come from accidents rather than illness.

Put those together and the picture is clear. The majority of people who find themselves unable to work are in Jess’s position — not covered by workers compensation, because whatever happened to them happened away from the job.

There is a second wrinkle. Workers compensation in Australia is run state by state and territory by territory. Where you work, and who you work for, changes what you would receive and for how long. Two people with identical injuries in different states can end up with quite different outcomes.

What Jess’s cover actually did

Jess took out an income protection policy last year, and she insured her total income of $2,360 a week rather than just the income from her main job. That distinction matters more than it sounds, and we will come back to it.

Under her policy she could receive up to 90% of her income each week for the first six months, then up to 70% through to age 65 for as long as she remained unable to work. Some policies index those payments over time. She would need to satisfy the policy conditions, and payments are made monthly based on what she was actually earning, up to her policy’s limit.

Older income protection policies were often more generous again. Some paid 90% of income right through to age 65.

When both apply, one reduces the other

If Jess had been hurt at work rather than at home, her income protection payments would have been reduced by whatever workers compensation paid her in place of her salary. The same principle applies if she went back part-time. Income protection tops up to the level of your cover. It does not stack on top.

An example of how that plays out. Say Jess was covered for 75% of her total income, with a 14 day waiting period, and she was injured at her main job in Victoria.

• Her income protection would pay $1,770 a week once the waiting period passed.
• Victoria’s workers compensation scheme would entitle her to 95% of her main income for the first 13 weeks — that’s $1,672 a week.
• Her income protection would make up the difference: $98 a week.

That looks like the insurance is barely doing anything. But workers compensation payments typically step down over time, while her income protection would keep paying at the same rate for as long as she was unable to work.

At week 14, most state workers compensation schemes drop to around 80% of pre-injury earnings — Jess’s Victorian entitlement would fall to roughly $1,408 a week. Her income protection is still paying $1,770. The gap she needs the insurance to cover jumps from $98 to several hundred dollars a week, and it keeps widening the longer she is off work. Thirteen weeks in, the two swap places.

The gap widens the more you earn

Income protection can generally cover 75% of incomes up to around $300,000 a year. Workers compensation in some states caps out at 95% of roughly $146,000 (Victoria’s cap; other states use different formulas and ceilings).

For someone earning well above that ceiling, relying on workers compensation alone would mean a significant drop in income at exactly the wrong moment.

Not all policies are the same

This is where it stops being a product decision and starts being a structural one.

Some insurers will cover a higher percentage of your income but cap the benefit period at five years. Others cost more for a longer benefit period. Waiting periods change the premium substantially.

Sometimes the answer isn’t one policy at all. Some people structure their cover as two policies: one with a shorter waiting period and shorter benefit period (typically cheaper), alongside a longer-period second policy. Whether that combination costs less overall than a single policy depends on your specific situation, but it’s a structure worth exploring with an adviser.

Where the cover sits matters too. There are cash-flow and tax implications to holding insurance inside superannuation versus outside — worth working through when structuring the cover, since the right split depends on how you are paid and how you draw from super.

There is also a point at which other cover takes over. If you were still unable to work after five years, total and permanent disability cover may come into play, which can reduce the need to pay for a very long income protection benefit period in the first place.

None of that is obvious from a product comparison website, which is part of the reason the outcomes differ. Industry data on advised versus direct-purchase policies shows a marked difference in claims-acceptance rates — around 95% for policies arranged through a financial adviser, compared with around 87% for policies bought directly online.

Worth checking

The question worth asking isn’t whether you have income protection. It’s whether what you have matches how you actually earn.

If you work more than one job, does your cover include all of it? If you are self-employed, what would you actually be paid, and after how long? If your income has risen since you took the policy out, has your cover kept up?

Those are quick questions to answer, and awkward ones to discover the answer to while you’re recovering from surgery.

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General advice warning: the information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Policy terms, benefit percentages, waiting periods, benefit periods and eligibility vary between insurers and between states and territories. The example scenarios above are illustrative only. Please consider whether this information is appropriate for you before acting on it, and seek personal financial advice where required. Insight Wealth Planning Pty Ltd is a Corporate Authorised Representative of GPS Wealth Ltd, ABN 17 005 482 726, AFSL 254544.