Not using the Income-Protection ‘Insurance’ that a client already has

Relatively few SOAs discuss ways that clients can insure their income other than through a dedicated income protection insurance policy. There are some good alternative forms of income protection insurance that many clients have access to. And, because dedicated income protection insurance policies need to be purchased, these alternatives can often save clients substantial sums of money.

The simplest method is often sick leave provided by employers. In many cases, this leave accumulates. That is, employees are able to ‘carry forward’ unused sick leave from one year to the next. For example, members of the Victoria Police are entitled to 15 days of paid sick leave a year. These days accrue if unused, meaning a member who has not taken a day off sick in five years will have 75 days available to him or her. These are working days, so this equates to 15 weeks, or 105 actual days.

For clients who have accumulated substantial sick leave, shorter waiting periods on their income protection insurance policies are often inappropriate. This is particularly the case because the income protection policy typically obliges clients to take employer-funded sick leave before they can make a claim on the policy anyway. There is simply no point in a client insuring for a period that is shorter than their current or recurring entitlement to unused sick leave. They are insuring for an event (the early days of an illness) that the policy does not actually cover.

Advisers recommending that their clients rely on this form of income protection need to state that they are doing this in the SOA. Make a virtue of it: show how much cheaper the income protection insurance policy becomes as a result of the strategy. Also, the SOA needs to include a comment that the client should contact the adviser immediately if their employment situation changes or if they use some of their employer-provided leave. New cover might be required if the client loses a substantial amount of accrued sick leave, either because they became ill or because they changed employment.

Many super funds, including in particular industry super funds, automatically include an amount of income protection insurance for their members. For example, members of HESTA receive ‘default cover’ of $850 per month (i.e. cover that is automatically provided by the fund unless the member states otherwise). This amount can be increased up to an amount equal to $25,000 per month or 85% of the pre-disability income, whichever is lower. The beauty of this type of cover for clients is that it can be paid using super benefits, which can make cash flow management easier for clients than purchasing the cover outside of super.

This cover, however, is typically limited to a period of no more than two years. One common strategy, then, is to use the super-funded option to insure the first two years of an illness, and augment this with a separate client-funded tax deductible insurance policy with a waiting period of two years. The premium for this length of waiting period is typically the lowest available, as very few illnesses last for longer than two years.

The Dover Group