Understanding your Firm’s Group Income Protection Scheme

31/07/2018

A number of Australian Law Firms will have a Group Income Protection (or salary continuance) Plan in place for their Partners.

Often this will work hand in hand with the Partnership Deed in regard to your profit draw entitlement ceasing after a period of time off work due to illness or injury.

For example, the Partnership Deed is likely to say that in the event of a Partner being unable to work for a period of 3 months or greater, profit draw entitlements will cease.

In this instance, it would be common for the Group Plan to have a waiting period of 3 months, meaning the commencement of monthly benefits would be payable by the insurer from that point onwards.

In this situation, from that point forward, the continuity of your income is completely reliant on the terms and conditions of your Firm’s Group Income Protection policy and any top up arrangements to boost the level of cover you’ve made elsewhere.

Nearly all Group Income Protection plans are different to one another so it’s vitally important you understand the inner workings of your particular plan.

Some of the more important considerations are set out below.

Level of Cover

Your level of cover is the monthly amount payable to you in the event you are unable to work due to illness or injury. It is deemed assessable income so should therefore be viewed as a before tax amount.

Most Group plans will have an Automatic Acceptance Limit (‘AAL’).  This is an amount of cover given to you upon joining the plan without needing to apply and provide evidence of insurability (health, pastimes and family history).

In the event of you being unable to work due to illness or injury, after the end of your waiting period, this monthly amount will be paid to you as assessable income either until you return to work or the expiry of your benefit period.

Often, the level of cover under Automatic Acceptance Limits will be well below your actual earnings.  In some instances, you will have the ability to increase your level of cover through the Group Plan by holding top up insurance separate to the AAL and paying for that premium separately (where your Firm pays the premiums) or in addition (where it’s your responsibility to pay for some or all of the premiums).

Some Partners will make arrangements to have this top up level of cover held separate to the Firm’s Group Plan to ensure portability and control, among other considerations.

Definition of Total Disability

From an Income Protection point of view, Total Disability refers to the insurance company’s definition of your inability to work, and therefore receive a full monthly benefit until you are able to return to work. I.e. if you are ‘totally disabled’ according to the definition of your policy, you will be entitled to the monthly benefit.

The way in which your policy defines Total Disability is therefore at the heart of this Plan.

Generally speaking, the more generous, flexible and clear cut the definition the better. The majority of Group Plans we see are fairly strict, rigid and arguable in the way they define Totally Disabled.

For example, a common definition we see in Group Salary Continuance Plans are:

You are totally disabled (and therefore eligible to receive your total monthly benefit) if:

  • you are unable to perform one or more essential and substantial duties of your usual occupation, necessary to producing income; and
  • Remain under the care of a medical practitioner; and
  • You are not engaged in any occupation, whether paid or unpaid.

Potential issues with this definition are:

  1. Which duties are or are not essential AND substantial? Ideally you wouldn’t be having this argument with your insurer when waiting on a monthly income payment.
  2. This definition precludes you from working AT ALL. Even if your Doctor suggests a gradual return to work, say half a day a week for a period of time, if this was to eventuate, your total disability benefit would stop and you would be assessed under a Partial Disability benefit, with a monthly amount calculated every month based on your loss of earnings.

A more generous, flexible and clear definition commonly found in an individual income protection policy is as follows:

You are totally disabled (and therefore eligible to receive your total monthly benefit) if:

  • you’re not working for more than 10 hours per week in your usual occupation or a gainful occupation, and
  • you’re unable to perform the important income producing duties of your usual occupation for more than 10 hours per week; and
  • You remain under the care of a medical practitioner.

As you can see, all that this definition requires is acknowledgement from a treating doctor that you are unable to perform your important income producing duties for more than 10 hours per week.

In addition, and very importantly, you are still able to work up to 10 hours per week and continue on a full claim.

Continuation Option

Most (but not all) Group Plans will have an option that allows you to continue your cover if you leave the Firm.

This can be beneficial if you have any future health issues as by exercising this option you can continue to hold valuable cover whereas without it you would have to reapply and may not be able to obtain it or may have exclusions placed on new benefits.

What’s important regarding a Continuation Option is how and when it can be exercised (by you) and in what form will benefits continue.

In particular:

  • Are you able to exercise the Continuation Option if you have previously made a claim on your Group Plan?  Most plans do not allow this.
  • Are you able to exercise the Continuation Option if you are leaving the Firm for a career break?  Most Group Plans will only allow the Continuation Option if you are going straight into regular employment
  • In what time period do you have to exercise this Option? Commonly it is 60 days. With so much happening during a change of Firm this can often be overlooked. Generally speaking, the insurance companies are not great at reminding you of this Option.
  • Can you continue to hold Agreed Value cover?  Some Group Plans will only allow this if your new role is as a permanent employee.  If you are becoming / remaining self employed (i.e. Partner with ownership, Barrister, changing to private practice) an Agreed Value policy may not be immediately possible.
Premium Structure

Some Firms pay the entire premium, others pay a portion with the balance payable by the respective Partner and others pass the entire cost on to each individual Partner as it relates to them (generally the cost of the AAL amount of cover will differ depending on age).

Particularly where you pay the full premium yourself, you should consider the benefits of remaining in the group plan compared to holding your own individual policy.  Reasons you might consider your own individual policy are:

  • Quality of cover
  • Portability of cover as you change Firms / jobs
  • Ability to access a level premium structure (where appropriate) to ensure long term affordability
  • Control
  • Tailored protection to suit your own individual needs
Guaranteed Renewability

Does your insurer offer Guaranteed Renewability of the Plan?  If not, it is at the insurer’s discretion whether they will renew the Plan on an annual basis.

Even if your Plan is Guaranteed Renewable, it should be remembered that because you are not the sole owner of the Plan (generally it will be owned by the Firm), continuation of the Plan will be at the discretion of the Firm and its Partners as a whole.

Recently with the rising costs of these types of arrangements, it is not uncommon for the continuation of the Plan to be put to a Partner vote.

What we have seen is that because a number of Senior Lawyers hold their own individual Income Protection policies (generally to avoid this type of situation), continuation of a costly group Plan is not well supported, potentially leaving those that rely solely on the Firm’s Group Plan exposed.

Benefit Offsets

What other benefit payments reduce the monthly benefit payable under your Firm’s Group Income Protection Plan?  And to what extent will they reduce the monthly benefit payable?

It is common for income protection policies to offset the amount payable by legislated compensation schemes and other income protection policies, but will your monthly benefit amount be reduced if the combined amount is still less than 75% of your pre-disability earnings?  Ideally not.

Benefit Period

This is the period of time the insurer will continue to pay you a monthly benefit so long as you are unable to return to work.

Ideally this will be to at least ‘Age 65’ but we have seen some Group schemes with benefit periods of only 2 years.

Minimum Membership

Is there a minimum level of participation required for the Plan to continue?

Some plans require a minimum percentage of Partners / members, others require a minimum annual premium.

If you are above this minimum but close to it, this can be a precarious position in regard to maintaining the valuable cover or having the Plan withdrawn by the insurer.

New Events or New and Existing Events

It’s important to know if your policy covers you for illnesses or injuries that occurred before the policy commenced or whether it covers you only for events that happened after you joined the Plan.

We trust the above is useful.

Please contact us with any queries at any time.

MCP Lawyers Life is a specialist personal insurance advice business for Legal Practitioners, helping them make smart decisions about their personal and family protection arrangements including Life Insurance, Income Protection.

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