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Should I take income protection as a lump sum?


Q. “I have been receiving income protection payments for the last 12 months due to an accident I had last summer.  I am 41 and my policy can pay me benefits until 65.  My insurance company is now offering to pay me out in one lump sum.  If I take the lump sum I am concerned that half of it will be lost in income tax.  Would that be the case, and if so, is there any way to reduce the tax?” Debra

Answer

Hi Debra -  It must have been a terrible accident – I’m so sorry to hear that. I am very happy, though, to hear that you had insurance cover, particularly as a report by the Financial Services Council found that less than 40% of Australian insure their income. Income Protection is something that most of us hope to never use – but it’s an absolute must to have, just in case!

Unfortunately I can’t give you specific advice in relation to the taxation of your benefit or what strategies you could use to minimise tax. The taxation treatment depends on several things including:

  • Whether the policy was held by you personally or whether it was held through a superannuation fund.
  • The specific terms of the policy – whether the lump sum payment is being classed as a permanent incapacity claim or advance payment of income.

Debra, your insurer should be able to advise you what the tax treatment of any payment will be. Suffice to say that it could indeed range from the entire lump sum being included in your assessable income this financial year and taxed accordingly – which would be a large amount of tax – through to receiving concessional tax treatment under the legislation relating to superannuation disability lump sum payments.

Some key questions to ask your insurer would be:

  • Can your insurer confirm how the lump sum payment will be classed for taxation purposes (for example, payment in respect of future income or disability lump sum)?
  • Can your insurer provide you with a written assessment of the taxation implications of taking a lump sum payment?
  • Can your insurer provide you with an indicative calculation of the total net benefit to you under each option? In other words, assuming current taxation and inflation rates, what is the total amount, after tax, that you would receive from a/ an income stream, and b/ a lump sum payment.

Very importantly, you must seek professional financial advice before making a decision either way. Your accountant should be able to advise you on the best course of action, taking into account your personal circumstances.

I would also suggest making an appointment with a specialist in Centrelink’s Compensation Advisory Service. A member of their team should be able to advise you on your potential payment eligibility for any Centrelink benefits, as well as advise you on what impact your ongoing income protection payment and/or lump sum payment would have on your eligibility for benefits.

Best wishes Debra!

Answer by: Justine Davies

Disclaimer:

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider obtaining professional and independent financial advice to assess whether the information is appropriate in light of your particular needs and circumstances.


Q. “I have been receiving income protection payments for the last 12 months due to an accident I had last summer.  I am 41 and my policy can pay me benefits until 65.  My insurance company is now offering to pay me out in one lump sum.  If I take the lump sum I am concerned that half of it will be lost in income tax.  Would that be the case, and if so, is there any way to reduce the tax?” Debra

Answer

Hi Debra -  It must have been a terrible accident – I’m so sorry to hear that. I am very happy, though, to hear that you had insurance cover, particularly as a report by the Financial Services Council found that less than 40% of Australian insure their income. Income Protection is something that most of us hope to never use – but it’s an absolute must to have, just in case!

Unfortunately I can’t give you specific advice in relation to the taxation of your benefit or what strategies you could use to minimise tax. The taxation treatment depends on several things including:

  • Whether the policy was held by you personally or whether it was held through a superannuation fund.
  • The specific terms of the policy – whether the lump sum payment is being classed as a permanent incapacity claim or advance payment of income.

Debra, your insurer should be able to advise you what the tax treatment of any payment will be. Suffice to say that it could indeed range from the entire lump sum being included in your assessable income this financial year and taxed accordingly – which would be a large amount of tax – through to receiving concessional tax treatment under the legislation relating to superannuation disability lump sum payments.

Some key questions to ask your insurer would be:

  • Can your insurer confirm how the lump sum payment will be classed for taxation purposes (for example, payment in respect of future income or disability lump sum)?
  • Can your insurer provide you with a written assessment of the taxation implications of taking a lump sum payment?
  • Can your insurer provide you with an indicative calculation of the total net benefit to you under each option? In other words, assuming current taxation and inflation rates, what is the total amount, after tax, that you would receive from a/ an income stream, and b/ a lump sum payment.

Very importantly, you must seek professional financial advice before making a decision either way. Your accountant should be able to advise you on the best course of action, taking into account your personal circumstances.

I would also suggest making an appointment with a specialist in Centrelink’s Compensation Advisory Service. A member of their team should be able to advise you on your potential payment eligibility for any Centrelink benefits, as well as advise you on what impact your ongoing income protection payment and/or lump sum payment would have on your eligibility for benefits.

Best wishes Debra!

Answer by: Justine Davies

Disclaimer:

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider obtaining professional and independent financial advice to assess whether the information is appropriate in light of your particular needs and circumstances.