Income protection lump sum payout

If you find yourself stuck at home – sick or injured – income protection provides a monthly payout so you can keep putting food on the table while you're unable to work. In some circumstances, it's possible to receive your payout as a lump sum. But is this the best option for you?

How does a lump sum payout work?

If you are sick or injured and unable to work for a while – or even ever again – you can breathe easy knowing your income protection policy will cover up to 85% of your income every month for a set period while you're recovering.

Depending on what your injury or illness is, some insurers offer your payout as an upfront lump sum rather than on a monthly basis until the policy expires. This can be particularly handy if you've accumulated significant medical expenses during your initial treatment.

How is an income protection lump sum settlement determined?

A lump sum payout isn't available for all types of illness or injury. For example, you can't take a few months off work for a broken leg and expect to get a lump sum paid out. Generally speaking, a lump sum benefit is available if you become totally and permanently disabled. Each insurer has its own criteria that must be met to be considered for a lump sum payout under total and permanent disability (TPD).

Conditions that are commonly covered by a lump sum benefit include cancer, stroke or quadriplegia, among others. Be sure to have a look in the insurer's product disclosure statement (PDS) for an exact list of qualifying events and medical definitions, as often you'll be eligible for a lump sum payout if your condition fits those pre-determined in the PDS.

To be eligible for a lump sum payout, you'll usually need to be medically certified that you are totally and permanently disabled. This means your doctor has decided you're unable to return to the workforce due to your condition.

Once your doctor has given you TPD certification, the lump sum settlement is usually determined as follows:

• Obtain all the information you'll need for your claim:
  • Insurance policy details
  • Date of last day actively worked (LDAW)
  • Date of initial consult with your doctor regarding the condition
  • Employment contact details
• Contact your insurer to let it know you need to make a claim. It will send you all the paperwork you'll need to complete for your claim and answer any questions you may have.
• Submit your claim form and any required documentation.
• Wait for the outcome.

Pros and cons of a lump sum payout

As with all things, there are pros and cons to consider:
Pros

• Money available upfront to cover significant medical expenses incurred.
• Peace of mind. The money has been paid in a lump sum, so you know it's all there available for use as needed.
• Provides choice. A lump sum gives you the freedom to spend it as you wish. It could be used to pay down debt or medical expenses, with the freedom to spend any remaining amount as you choose.

Cons

• A lump sum may exhaust your policy. If you take a lump sum, you may not be eligible for any further benefit under this policy.
• Money needs appropriate management. Managing a large sum of money may require some degree of financial planning or budgeting.
• Taxed at your marginal tax rate. If your lump sum payout pushes you into a higher tax bracket, you could end up losing a significant portion due to tax.

What are the alternatives if I don't get a lump sum payout?

If you don't choose a lump sum payout, you can receive your benefit on a monthly basis for a specified period. If you've met the criteria for a lump sum payout, generally you'll be eligible to receive the monthly benefit up until age 65 (depending on your insurer and policy).

Which income protection offers a lump sum payout?

Here is a list of insurers that offer the option of a lump sum payout:

Brand	Offers lump sum payout?	Apply
		Go to site
		Go to site
	Optional	Go to site
		More info
		More info
		More info

It's wise to always read the PDS before deciding on the right policy for you as each product varies slightly.

Frequently asked questions

Are lump sum income protection payments taxable?

Yes. The total amount is taxed in the financial year it is paid out. However, CommBank policies have an option to claim a tax-free lump sum. The premiums for this option are only 90% tax-deductible.

Can I get my income protection payout as a lump sum?

If your insurer offers lump sum payouts, you'll need to meet the criteria for a lump sum payout as set out in its PDS.

Should I choose a lump sum payout?

If you are offered a lump sum payout, it's a good idea to seek financial advice to be sure it's the right decision for you.