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Income Protection - Finer Detail Series

Part 1 – Income Protection Definition of Disability

Income protection policies accross Australia vary greatly unlike other types of personal insurance, let alone General Insurance policies. In addition to the sum insured or monthly benefit amount, the waiting period, benefit period, type of contract (agreed amount or indemnity) and additional benefits are some of the features that need to be taken into consideration when matching your situation to a policy. Please see below for a brief description on each:

It is usually the case that the devil is in the detail when comparing products and this is certainly the case with Income Protection. This article explains the concept of ‘total disability’ and how the differences between contracts can sometimes mean the difference between being able to make a claim or not on your Income Protection insurance.

Australian Income Protection policies commonly use three distinct definitions to assess degrees of disability:

  • Duties based – where you are unable to perform important duties relevant to your specific occupation. This is the most common basis (especially for older policies).
  • Hours based – where your working hours are reduced in your occupation.
  • Income based – where you suffer a loss of ability to generate income.

Policy Definition What it means….
Duties Based You will be paid a full benefit if you are unable to perform income producing duties of your occupation and due to this you are not working. A reduced Income Protection benefit will be payable if you continue to be in paid work.
Hours based You will be paid a full benefit in the event that you can not work in your own occupation for more than 10 hours per week. You will be paid a reduced Income Protection benefit if you work in your own or any occupation for more than 10 hours.
Income based You will be judged as disabled if, due to illness or injury, you suffer a reduction in earned income of 20% or greater. If you continue to work and earn income, the income protection benefit that you receive will be reduced.

 

The majority of Income Protection policies use the duties based definition however there are now policies that include all three definitions and enable the client to choose which definition they are best suited to at claim time.

Case Study - How the different definitions apply

Joseph is a Dentist. He primarily works as an employed dentist (45 hours per week) however also performs some training at the local dental college (on average 8 hours per week). Last financial year his income was as follows:

Dentistry: $160,000
Training: $30,000
Total income: $190,000

Joseph has Income Protection insurance with the maximum benefit allowable by most insurers of $11,875 per month (75% of total salary package).

Joseph has an accident whilst skiing on holiday with his family and due this he has minor loss of feeling in his left hand and can no longer operate as a dentist. He is able to continue with his training at the college in the mean time as he undergoes rehabilitation for his hand injury.

Pre-disability income: $190,000 ($15,833 per month)
Post disability income: $30,000 ($2,500 per month)
Insured monthly benefit: $11,875 per month

Joseph makes an Income Protection claim. How much will he receive? Depending on which definition his Income Protection policy contains, Joseph would receive one of the following amounts:

Duties Based

Joseph qualifies for a claim as he is unable to perform dental surgery which is one of his income producing duties. He is however continuing to work in some capacity so his monthly benefit will be reduced as follows:

Monthly benefit = pre-disability income – post-disability income X insured benefit pre-disability income
= $10,000 per month

Hours based

Joseph qualifies for a claim as he is unable to work in his usual occupation for more than 10 hours per week. Joseph would receive the total benefit:

Monthly benefit = $11,875 per month

Income based

Joseph qualifies for a benefit as his earning capacity in his own occupation has reduced by more than 20%. His monthly benefit to be received will be calculated as per the above example for the duties based definition:

Monthly benefit = $10,000 per month

The money is received as monthly payments from the insurance company and Joseph uses the payments to replace the income that lost due to not being able to operate.

Conclusion: Compare your Income Protection policy! Have your policy reviewed by someone who understands your occupation to ensure that you have an understanding of the definition of disability relevant to your Income Protection policy. The more flexibility that you have, the easier it will be for you to make a claim on your Income Protection policy in the event of something going wrong. It may be worth an upgrade if you could fall into the same category as Joseph above!

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CORRECTIONS REQUIRED:

After having had my income protection, with a company based abroad, for the last 15yrs I recently decided to sort it here in Australia.(Now based here so it makes sense.)
Needless to say the thought of trying to get a similar product for a good price was a concern....

Dr S.T (BDSc)
Dentist
Newman, WA.


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