Income protection insurance policies pay a benefit which is equivalent to a percentage of your wages should you ever become sick or injured and unable to work. The contents of your income protection policy will determine how much you will be paid if you make a claim.
Indemnity vs Agreed value income protection policies
How much you will be paid under your income protection insurance depends on whether or not your policy is an indemnity of agreed value policy.
The most common policy is the indemnity policy which pays a benefit of up to a percentage of your income before you ceased work due to illness (pre-disability income).
Income protection benefits can also be agreed value policies. As their name suggests, these policies provide a benefit of an amount agreed between you and your insurer.
However, many people do not realise that to be paid income protection benefits at the agreed rate, you usually still need to show that you were earning the amount you are insured for when the policy was taken out or at some time in the years since. This is usually called verifying your income.
If your income has been verified when the policy was purchased, you will be paid the agreed value amount.
If your policy is an indemnity policy, it is a bit more complicated.
Your benefit under an indemnity policy
Your monthly income protection benefit under an indemnity policy is not as simple as just working out what your monthly salary would have been if you were at work.
Depending on the level of cover you have, the monthly benefit you get paid will likely be 75% or 85% of your income.
If you have insurance through a super fund, you may get paid 75 or 85% of your monthly income but a percentage of this payment will be paid into your super account (like an employer contribution). Therefore, the amount you’ll see coming into your bank account will still be 75% of your income.
How is my monthly benefit calculated?
All policies are different in the way that they work out your income for the purposes of paying you a benefit. In our experience, the most common method for insurers to calculate your benefit is to average out your monthly income over a period (usually 12 months) prior to you becoming partially or totally disabled (usually called your “pre-disability income”) and pay your benefit according to a percentage of that income.
This can be detrimental for sick or injured people if they continued to work after they were diagnosed, but in a reduced capacity and thus, a reduced income.
Consider, for example, the following:
- Susan is 45 and employed full-time.
- She suffered a back injury and had to slowly reduce her work hours over 12 months and take periods of leave before she ceased work and became totally disabled.
- At no time did she take enough leave for her waiting period (the initial period she has to wait before benefit payments commence after her claim is accepted) to be fulfilled and her entitlement to income protection payments to start.
- During this period of reduced work and time off, her income was less than when she was working full-time due to the reduced hours and time away from work.
- She then made a claim on her income protection insurance.
- The benefit that Susan is paid is reduced and less than what it would have been if she ceased work straight after her back injury. In other words, Susan is penalised by the terms and conditions of her policy for continuing to work.
Other important things to be aware of:
- Investment income is not usually included in the insurer’s calculation of your income before you become sick. Usually, the insurer will only include income earned from your own personal exertion (that is ordinarily, your employment) in its calculations.
- Similarly, if you cease work and are claiming income protection benefits, investment income is not usually income for the purposes of calculating any offset of your income protection entitlements.
- No income protection benefit payments will be paid to you in the waiting period.
- As part of your claim, the insurer will likely insist on being provided with payslips and tax documents verifying your income before and after you ceased work.
Therefore, if you become sick or injured and you are unable to continue to work in your usual capacity (usual duties, usual hours), you should seek advice of what the impact of continuing to work may have on your income protection claim.
If you’ve made a claim on your income protection insurance and are unsure about whether your monthly benefit has been calculated correctly or your claim has been outright rejected, get in touch with today’s blog writer, Tom Cobban, for some free legal advice.