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Lump Sum Benefit Option

Traditionally, once you claim on an income protection policy, the benefit is paid in regular monthly benefits.
However, select insurers offer a lump sum option as an optional add on to your policy, giving you the flexibility to choose to claim your income protection insurance benefit in a single lump sum payment if you suffer total and permanent disablement before your policy expiry date.

Claiming the Lump Sum Benefit

In order to claim a lump sum benefit you will generally need to be considered totally and permanently disabled. Generally, your insurer will consider you to be totally and permanently disabled if:

  • You have been absent from active employment as a result of sickness or accident, and

  • After the period for which you must be absent from active employment, you continue to be incapacitated to such an extent that you will be unlikely to engage in your occupation ever again, and

  • You are under the regular treatment and following the advice of a medical practitioner.

The definition of total and permanent disablement may vary between insurers, so please consult your insurer’s PDS for further clarification.

How much is the Lump Sum amount?

Each insurer has a different calculation of the lump sum benefit payable, therefore it is best to refer to the relevant PDS. However, below is an example of one currently available:

The lump sum benefit paid will generally be the lesser of:

  • $3,000,000

  • An amount equal to ‘A’ times your annualised monthly benefit, which is calculated as follows:

12 X (B minus C)



‘A’ is:

15, if the number of years you will reach on your next birthday after the lump sum benefit payment date is less than 40 years

13, if the number of years is 40 years or more but less than 45 years.

11, if the number of years is 45 years or more but less than 50 years.

9, if the number of years is 50 years or more but less than 56 years.

65 minus the number of years you will reach on your next birthday after the lump sum benefit payment date, if the number of years is more than 55 years.

If the lesser of the above amounts is a nil or negative amount, the lump sum benefit will is nil.

‘B’ is:

The total of your monthly benefit and any super continuance benefit.

‘C’ is:

The amount by which the lump sum benefit, which would have been payable to you had you not elected to receive the Lump Sum Benefit Option, would have been reduced by any benefit offsets.

‘D’ is:

1, unless the total and permanent disablement for which the lump sum benefit is payable is a serious medical condition as defined by your insurer, in which case ‘D’ is 0.75.

Lump Sum Benefit Example

Mary is 42 years old and became totally and permanently disabled after an accident at work. She chooses to receive a lump sum benefit instead of regular monthly benefit payments.

Mary’s annualised monthly benefit works out to be $42, 320.

She will therefore be paid $520,160 (that is, 13 X $42,320), as this amount is less than the maximum of $3,000,000.

Is the Lump Sum Benefit taxable?

Unlike a traditional monthly income protection benefit, a lump sum benefit is generally not assessable for tax purposes by the ATO if your policy is outside super. This also means that the premiums you pay towards the Lump Sum Benefit Option are generally not tax deductible.   

However, it is important to consult a tax agent before hand to find out whether your lump sum benefit will not be considered taxable.

If you are considering income protection cover that offers the lump sum benefit option, please call us today on 1300 135 205 to find out which policy is the strongest.