Are you contemplating about getting income protection soon?
If yes, then you better read on this article to learn about the three-tier approach to income protection insurance.
As you have known already, income insurance is all about receiving an specific amount of money in the event that the policyholder becomes incapable to earn income due to sickness and accident. Often times, this benefit is given monthly, but it can also be given weekly depending on what the policy document stated.
Now, you might wonder, “How about if I’m not totally disabled and that I still earn a part of my income during this period? Would I be entitled to receive benefits? If yes, how much?” Well, this is basically where the three-tier approach to income insurance comes into play.
Today, more and more insurance providers are using this approach to compute policyholders’ benefits. This typically includes the following definitions: duties, hours, and income. But in order for a policyholder to avail of partial disability benefits through any of these definitions, he or she must be able to meet a certain waiting period.
It’s also important to take note that the three-tier approach is dependent upon the policyholder’s income and work situation at the time of the insurance claim. So if you are thinking about purchasing a policy, be sure to take all these definitions into consideration and choose only the policy that is best tailored to suit your needs.
Duties-based definition (Most common)
As an employee, you have certain duties to perform inside the workplace, right? So here, as the name implies, when you apply for an income insurance claim, your ability to perform your office duties will be greatly considered. Once you’ve met this criterion, you will be paid with partial disability benefit, which will be computed using this formula: pre-disability income less post-disability income divided by the result after multiplying pre-disability income with the monthly benefit.
Do remember that this definition is the standard in the insurance industry and works best if you are a salary-based employee.
Unlike in the first definition, here what insurance providers consider is the number of hours that you actually spend at work. So typically, you may encounter a “10-hour clause” in your policy, which means that you will be allowed to return to work for up to 10 hours and still be entitled to full amount for total disability. Take note, however, that this works best for self-employed individuals. This is without doubt the most flexible and best definition.
This definition also works best for self-employed people, who perform administrative duties at the same time but are incapable to accomplish tasks that require strenuous physical movement because of their sickness or injury, and thus are unable to earn income.
But in some companies, employed people can also be covered by this definition and will be paid full benefit, as long as they earn up to 20% of the income that they receive prior to disability.
So here, regardless of how many duties you perform or how many hours you work, as long as you’re still sick or injured and you are unable to work, you will receive benefits.
Three-Tier Approach in Superannuation
The rules in computing payments of benefits greatly varies when the definitions under the three-tier approach operate in superannuation. In some instances, part of your income insurance proceeds will be retained within the super fund and is likely to be transferred to your superannuation balance. To know how much you’ll receive if your policy is within superannuation, you can refer to the Superannuation Industry (Supervision) Regulations 1994, Schedule 1. Here, you can see a list of the conditions of release from superannuation under item 109, Temporary Incapacity.
So, what’s the rule under Temporary Incapacity? Well, this basically states that income protection insurance payments must be non-commutable income stream sourced from the super fund for: one, the purpose of continuing the reward or gain which the policyholder receives prior to disability, and two, a period not exceeding the duration when the policyholder become incapacitated to work. So, this means that in superannuation, income-based definition is primarily used. Thus, if you have this super fund, you won’t be eligible to earn more money than what you only earn before you become incapacitated to work.
So would you still choose superannuation or not? Because it’s most likely that you’ll receive far less income from a policy held within super than the one outside superannuation. If you’re having difficulty choosing between the two, make sure you speak to one of our advisors.
We will assist you prior to purchasing income protection insurance and provide you with detailed explanation about this three-tier approach and superannuation.