Income protection insurance offering lump sum payout

Income protection insurance is a kind of insurance that can cover you for loss of earnings, should you find yourself unable to work due to an illness or accident. It is intended to help supplement your insurance, and in some situations, it can come with a lump sum payout.

How does income protection insurance work?

Income protection insurance is designed to provide cover for part of your income, which can be up to 85% of your pre-tax income, according to Moneysmart, for a set period to help you pay any bills and living costs in case of a serious injury or illness that prevents you from working.

Insurance policies often come with extra options and questions you’ll need to answer so the policy can be tailored to your needs and preferences.

In the event of a successful claim, income protection insurance normally offers you a regular monthly payment. But one thing to consider may be whether you want a policy that offers you the option of receiving a lump sum payout in certain situations.

This could be useful if you find yourself in a position early on after an injury where you need to pay for some upfront medical costs or other treatments.

What situations may allow you to claim a lump sum payout?

Insurance providers that offer the option of a lump sum payout under their income protection products will have their own conditions, but there may be an option if you suffer one of the following events:

• total and permanent disability (TPD)
• pre-specified injury (pre-specified meaning named on the policy as an injury you’re covered for)

It is important to check with your own insurance provider and look at what is covered in the PDS of your particular policy.

The exact types of events that you can claim a lump sum payout for will depend on your policy, so it may be worth checking upfront with your insurer before signing up to anything.

When making a claim you may need to provide medical evidence that your condition is one that prevents you from working and meets the conditions of your policy.

Which income protection insurers offer lump sum payouts?

At the time of writing, there are no insurance providers on Canstar’s database who offer lump sum payouts as part of the contract. As such, it may be worthwhile to contact your insurance provider directly and ask if there are any circumstances in which they may exercise discretion to provide one.

If you’re considering taking out an income protection insurance policy, be sure to read the PDS and make sure you understand what payout options may be available and under what conditions.

Income protection cover may also be available through your super. Generally speaking, this type of cover only offers income protection benefits as an income stream rather than a lump sum, but it could be worth checking with your super fund to find out what options they offer.

Pros and cons: could a lump sum payout be a good option for you?

If you are eligible, whether a lump sum payout ends up being the best choice for you or not will depend on your personal needs and circumstances. There are a few general points to keep in mind when considering this as an option.

Taking your income protection benefit as a lump sum may, depending on your policy, preclude you from receiving any further benefit or income from your policy.

If your illness or disability will likely require an ongoing income stream to maintain or treat, a lump sum payout may not be a suitable option for you.

A lump sum payout may be beneficial if your injury or illness leaves you with immediate and significant expenses that need to be paid. A lump sum payout could be used to help you cover those costs.

The Australian Tax Office says you may need to declare any lump sum or regular payment from an insurance policy as part of other income you’ve earned, unless any tax has already been withheld. You will need to check this with your provider.

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