Six Stones – 2. Income Protection Part 2.

Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow.

He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.

In our last post, we started looking at Income Protection insurance – this time we’re going to get deeper into the details!

How Much Does It Pay?

Another question is how much will the insurer pay – because it’s not necessarily a fixed amount.

Certain types of Income Protection contracts, known as ‘Indemnity’ contracts, don’t offer a guaranteed level of monthly benefit.

Instead, the benefit that’s paid will be based on the level of income you were earning prior to your disability – not necessarily the amount on the policy.

Say your policy provides for a $750 monthly benefit, which is 75% of the $1,000 you were earning at the time you got the policy.

You keep paying the premium over the years, but last year you decided to reduce your work hours to spend more time at home. This meant that your income dropped to $700 a month instead.

If you then make a claim, your Indemnity contract will pay either:

–           75% of the $700 a month or

–           The amount on your policy, whichever is lower.

This can mean that while you were paying for $750 a month of cover, you’re really only entitled to $525 per month.

This means that regularly reviewing your policy – every few years, or at least when you have a change in your income – is critically important, especially for Income Protection.

And, because, these are complex contracts, so I encourage you to get personal financial advice before making final decisions about your policy.

I think it comes through that the criteria insurers use to assess Income Protection claims are both more structured and easier to satisfy than the high hurdle of a TPD definition.

Quick, to the Soapbox!

Incidentally, there used to be a type of contract you could buy that avoided this issue. These were called ‘Agreed-value’ contracts, but were effectively banned by the insurance regulator APRA in 2020.

Why? Well, from what I can tell, because they were costing insurance companies too much.

That’s right – the public regulator took away an option that benefited the public because it was costing insurers too much money (never mind that their own mismanagement of the product directly contributed to the problems the regulator was ostensibly trying to fix).

Just a minute while I step down from my soapbox…

Some Other Things To Look Out For

There’s been a lot of innovation in Income Protection over the years, which can make them even more confusing.

Knowing which of the laundry list of benefits and features are worth focusing on is incredibly difficult, but here are a few you might come across.

–           Recurrent Disability

As it sounds, this feature makes it easier to start receiving benefits again if a disability returns. This can be useful for long-term, but less serious injuries with a fluctuating level of capability.

–           Superannuation Option

Some policies allow you to add on an extra amount to cover a portion of the superannuation contributions you would have received if you’d been able to keep working. If you think about the impact this can have for a long-term claim, it’s easy to see why this has been added to policies.

–           Trauma Benefit Option

Another optional benefit – this one allows for a lump-sum payment equal to a few months benefit (normally six) if you’re diagnosed with one of the critical illnesses. Very similar to the Trauma Insurance we’ve spoken about previously. You should also note that this option can often change how much of a premium is tax deductible.

–           Superannuation Ownership

Just like with Life and TPD insurances, you can own your Income Protection within super.

But of the three, this is the trickiest of the decisions. There can be issues around getting any benefit out of super, the policies in super are often not as well-featured as those outside, and the taxation equation is quite different.

On the plus side, though, it can be a good way for people without spare cashflow to access important coverage.

I know I’ve said it a few times – but please get personal financial advice before making this decision.  

–           Business Expenses

I’m including this cover here for a few reasons – laziness, sure, but also because it’s a bit out of the scope of what we’re covering in this book.

Business Expenses is like Income Protection, but for your business. It covers the very specifics expenses that you’ll need to pay to keep the doors of your business open if you can’t work for medical reasons.

It’s not exactly the same (it only pays for 12 months and is far more specific) but if you’re self-employed and have fixed costs, you should speak with somebody about how this particular policy might suit your circumstances.

Your Income

Finally, I’d like to make one quick observation about your income.

Your Income Protection policy is based around this idea of your ‘pre-disability’ income, which when you claim you’ll need to prove.

The easiest way to do this is by providing your Income Tax Returns and Notices of Assessment. There are other ways, but honestly they’re a pain in the neck and drag out the process.

So to help future-you when you go to claim, scan your tax returns. You would be amazed at the trouble we have arranging tax returns when we’re helping somebody claim.

Keep the tax returns for the two years prior to the start of your policy, and the last three years on a rolling basis. Most are online now, anyway, but if not, add scanning them to your annual life-admin list.

Future-you will be oh-so-grateful!

Even for those that have come out of their divorce with a significant level of assets, the income you earn will largely dictate how your new financial life looks.

Protecting that income is a sensible thing to do, even if the way we do it looks rather complicated!