Lump Sum Payment

The Lump Sum Payment option is an optional benefit available with your income protection policy. You may want to consider it if you don’t have a TPD policy.

How does it work?

Generally, income protection pays out a monthly benefit if you are unable to work due to a sickness or accident.

However if you satisfy the Any Occupation TPD Insurance definition, you may be eligible to receive a lump sum benefit – if you have selected this option as part of your policy. You do not need to exercise the option and can still receive a monthly benefit if you wish.

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What is the “Any Occupation TPD” Definition?

The definition will vary between insurers but generally means:

It is unlikely you will ever be able to work in any occupation for which you are reasonably suited to by education, training or experience due to total and permanent disability.

For a more detailed definition please consult the relevant Product Disclosure Statement.

What are the tax Implications of accepting a lump sum benefit?

If you choose to receive a lump sum benefit, it will generally not be subjected to tax. However the portion of your income protection premiums which goes towards paying this option will not be tax deductible.

What amount will I receive?

The benefit you will be eligible for will vary according to your age and between insurers as each life insurance company will have a different method of calculating the lump sum benefit. Generally the amount you will receive will depend on your monthly benefit and your age.

Example calculation:

Your benefit payment will be the lesser of:

  • $3,000,000; or
  • A sum that is equal to ‘A’ times your annualised monthly benefit

Where ‘A’ is:

  • 15 if your age next birthday is lower than 40 years
  • 13 if your age next birthday is between the ages of 40 and 44
  • 11 if your age next birthday is between the ages of 45 and 49
  • 9 if your age next birthday is between the ages of 50 and 55
  • 65 minus your age next birthday when the income protection lump sum benefit
  • becomes payable if your age next birthday is 56 or greater when the income
  • protection lump sum benefit becomes payable.

Case Study

Aria takes out an income protection policy with a monthly benefit of $5000 per month which includes the lump sum benefit option.

Several years later at the age of 41, Aria is involved in an accident and is rendered totally and permanently disabled, meeting the Any Occupation definition.

As she is eligible and included the lump sum benefit option as part of her policy, she has the option of receiving a lump sum of $780,000:

  • Annualised monthly benefit is 12 x 5000 = 60,000
  • ‘A’ is 13 as she is between the ages of 40 and 44
  • Benefit is 60,000 x 13 = 780,000

Alternatively Aria can choose to receive her $5,000 monthly benefit instead

Please be advised that this is a general guide only and we are not registered tax agents under the Tax Agent Services Act 2009; and if you intend to rely on the advice to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. Please consult your tax accountant or speak to one of our financial advisers for further information.

Published: August 20, 2015

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4 Comments

  • Solomon Roberts |

    My income protection insurance has offered to settle a lump sum of $447,000. I will be 60 years old in November 2017. I currently receive a monthly benefit of $9770. My policy expires in Feb 2022.
    1. Is the settlement amount accurate ?
    2. Is the amount taxable?

    • Russell SPECIALIST
      Russell |

      Hi Solomon

      Thank you for your question, I am assuming that you do not have the “additional lump sum option described above”, you are the policy owner of your policy and that you have been offered by your insurer to commute your normal monthly benefits into a lump sum settlement.

      Please note I am not an accountant and you should seek legal and taxation advice from a specialist before accepting a commuted lump sum settlement offer on your income protection policy however here is some general information that should be able to assist.

      Firstly the lump sum calculation offered will always be below your full entitlements (which I am assuming again you have a policy with a benefit period to age 65 – Important to check). If you were to continue to be on claim till this time your total benefits would be an estimated: 5 ½ years x 12 x $9,770 which would pay you a total benefit of $644,820. Therefore your offer of $447,000 seems to be close to 74% of the potential total based on my assumptions (You should find out exactly how many months benefits you could be entitled to before considering if the offer is appropriate, as each person’s situation is unique).

      Secondly as I am sure you know monthly benefits from an income protection policy are generally tax assessable in the year you receive the benefits from the insurer. Based on this and this tax ruling from 2003 it would suggest that the commuted lump sum settlement of your income protection monthly benefits would be assessable in the year your received them.

      This is a very important decision and I strongly urge you to see taxation and legal advice before you proceed or accept the commutation. If we can be of any further assistance please reach out to us on 1300135205.

    • Solomon Roberts |

      Thank you Russell

      If I accept the commuted lump sum settlement after this finanancial ( 1st July 2017) would I have pay tax.

    • Russell SPECIALIST
      Russell |

      Hi Solomon

      I am not an accountant therefore you should seek taxation advice from a specialist before making any decisions around your commutation offer and the tax implications.

      Sorry I couldn’t help further.

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