2009 NATIONAL CONFERENCE
Life Insurance Case Study 1
Issues: Income Protection - method of calculating pre-disability income - application of CPI procedural issues affecting benefit payment
Ms W purchased an income protection policy in December 1993 with the insurer member IP. The
policy provided both Total Disablement Benefits, and a Recovery Benefit if she was able to return to
work earning a reduced income. Under the policy:
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Monthly Total Disablement Benefit was the lesser of a specified sum (Total Disablement
Benefit) and 75% of the insured’s (pre-disablement) “Average Monthly Earned Income”; and
Recovery Benefit was equal to
(A - B) x C
A
where:
“A” is Average Monthly Earned Income;
“B” is Current Monthly Earnings from the occupation or work engaged in; and
“C” is the Total Disablement Benefit current for that month.”
“Average Monthly Earned Income” was defined as “your average monthly income earned
through personal exertion in your occupation or work, before tax. It is calculated using your
highest income for any 12 successive months during the three years before your Total
Disablement, after deducting expenses incurred in earning the income. It does not include
investment income.”
“Current Monthly Earnings” was defined as “your earnings through personal exertion in your
occupation or work, after deduction of expenses incurred in gaining the income but before tax,
in any month the Recovery Benefit is payable.”
Monthly total disablement benefit was indexed annually on the policy anniversary in
accordance with CPI for the preceding year; for any period for which benefits were paid,
Average Monthly Earned Income was indexed by the same amount on the same date.
No benefits were payable until IP was provided with (among other information) proper
evidence satisfying it of the insured’s Average Monthly Earned Income. The insured was also
required to provide, at their expense, any verbal or written evidence IP required, including
satisfactory evidence of the income amounts stated as part of the application for the policy.
No premium was required in respect of any period for which the insured received benefits.
Life Insurance Case Study 1 - Page 1 of 4
Ms W ceased work following an episode of cardiac arrhythmia on 26 February 2002, and returned
to work on 8 April 2002 on a part time basis. This was not her first such period of disablement.
Before February 2002, Ms W had been primarily self-employed as a general medical practitioner on
a full-time basis. Ms W had been engaged by a number of doctor’s surgeries and hospitals on a
contract basis. However, she had been limited in the extent of the duties she could perform since
her return to work.
The claim form asked for details of “actual earnings from personal exertion, after deduction of any
business or professional expenses, but before tax in the 12 month period prior to the date you
stopped work?” Ms W advised the member that taxable income for the financial year ending 30
June 2001 was $20,738, and her estimated net income for the period 1 October 2001 to 31
December 2001 was $10,159.
IP calculated Ms W’s pre-disablement income to be $40,640.00, using the estimated net income
for the three month period 1 October 2001 to 31 December 2001 on a pro rata basis, and therefore,
sufficient to support a benefit of $2,539.00 per month.
After the expiry of the four week waiting period, IP paid Ms W “Total Disablement Benefits” for the
period 26 March 2002 to 7 April 2002; and 50% “Recovery Benefit” for the period 8 April 2002 to
25 June 2002. It continued to pay the Recovery benefit after that date. Because Ms W’s
employment made it uncertain whether she would be entitled to a benefit until information was
provided after the event, IP required he to pay premiums
In April 2005, IP notified Ms W she would be paid for 26 December 2004 to 25 February 2005
inclusive on a 93% recovery basis. Ms W queried why the level of Recovery Benefits payable had
increased from 50%, or $1,156.50 per month, to 93%, or $2,162.95 per month.
This prompted a full review of all benefit payments and entitlements from 26 March 2002 onwards.
IP asked Ms W to provide copies of her Income Tax Returns and Income Tax Assessment Notices for
the financial years ending 30 June 2002 and 2005 [she had previously provided the returns for the
years ending 2003 and 2004].
In December 2005, IP advised that it had recalculated Ms W’s entitlements based on available
information, concluded that she had been underpaid $14,169 (which it would be sending her), and
requested tax returns and assessment notices for the years ending 30 June 2000, 2001 and 2002, to
establish which was her highest earning year in the 3 years prior to her disablement. It stated that if
she chose 2002, IP would take into consideration that she only worked approximately nine
months of that year and pro-rata this income to provide an annual income amount accordingly.
There have been further adjustments since that time as a result of further information and
reassessments. Ms W continues to be certified as not yet fully fit for full-time work.
Life Insurance Case Study 1 - Page 2 of 4
QUESTIONS FOR DISCUSSION
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How should Ms W’s pre-disability Average Monthly Earned Income be calculated?
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Should the Average Monthly Earned Income be calculated using Ms W’s “highest
income for any 12 successive months during the three years before [her] Total
Disablement, after deducting expenses incurred in earning that income”, in
accordance with the definition of Average Monthly Earned Income in the policy?
OR:
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Should Ms W’s pre-disability income be calculated on the basis of the agreement
between the member and Ms W at the inception of the claim, that Ms W’s
income for the October to December 2001 quarter be pro-rated across the entire
2001 financial year?
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What expenses should be “added back” to Ms W’s pre-disability income?
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Home office expenses? Does it matter whether Ms W’s home office is a place of
business or registered as a business (for Australian Taxation Office’s Tax Ruling
93/30?)
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Depreciation (for example of a motor vehicle)?
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Medical Defence fund, to the extent it was overpaid for a given year?
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Conference expenses (incurred in one tax year but claimed in another - which
year)?
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How should Ms W’s post-disability Current Monthly Income be calculated? What
expenses should be “added back” to Ms W’s pre-disability income?
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Is Ms W entitled to CPI increases on her pre-disability income and recovery benefit?
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In the circumstances described, is the request (some years after the event) for the 2003,
2004 and 2005, and then the 2000, 2001 and 2002 tax returns consistent with the duty
of utmost good faith? (Ms W encountered difficulties in obtaining this information given
the passage of time since initial payments, her condition and a change of accountants
since then.) If not, what follows from this?
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Should IP be entitled to require Ms W, pending assessment of her entitlement to
benefits, to pay premiums on the policy?
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If Ms W has been underpaid, should IP:
o Pay interest on the arrears (and how should this be calculated)?
o Compensate Ms W for any Centrelink benefits she was required to repay as a result
of the arrears payments?
Life Insurance Case Study 1 - Page 3 of 4
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Is it fair and appropriate for Ms W to:
o estimate her Currently Monthly Earnings as and when required by the member;
o provide copies of her Income Tax Returns and Income Tax Assessment Notices for
the corresponding financial year, once prepared;
o both (and if so, how should any adjustments be dealt with)?
Life Insurance Case Study 1 - Page 4 of 4