Income Protection Insurance - Commutation Offer

Discussion in 'Accounting & Tax' started by 1961, 21st Jan, 2020.

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  1. 1961

    1961 Member

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    I am 39 years old and have an MLC income protection policy that pays $55,000 per year which increases with inflation until age 65.

    They have offered a once off lump sum of $445,000. This appears to be a low offer.

    I believe this will be fully taxable. Legislation allows for say sportspersons to average out there salary but I couldn't find anything that would allow similar when it comes to income protection payouts.


    I would love to talk to someone who has went through the commutation process.

    Thanks for reading
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Sorry I can't help with that, but just wanted to note that you have 26 years left before hitting 65 years of age and 26 x $55k would be $1,430,000 - not taking into account the increases with inflation. less than 1/3!
     
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  3. spludgey

    spludgey Well-Known Member

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    Not taking into account tax brackets either!
     
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  4. wylie

    wylie Moderator Staff Member

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    We've been clients of Jason for years, and he knows what he is talking about.

    Jason Nairn | Financial Adviser/Director
    Linked Financial Services Pty Ltd (ABN 27 164 559 951)
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  5. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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  6. 1961

    1961 Member

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    Thanks Wylie
     
  7. 1961

    1961 Member

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    Thanks for the link. Its very interesting. I have been speaking with Col. A knowledgeable guy
     
  8. 1961

    1961 Member

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    Tax is a killer!
     
  9. 1961

    1961 Member

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    Sorry about the late responses. My health has been poor
     
  10. 1961

    1961 Member

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    Hi Terry. Agreed its a very low offer. I will post an update/final outcome in the coming months
     
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  11. Jobby

    Jobby New Member

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    I used to work in life insurance. That offer is actually quite generous. It is the discounted net present value of the future payments. The discount rate is calculated by taking into account factors such as your life expectancy etc. Usually the discount rate applied is quite hefty. Think about it, the insurer can take that $445,000.00 invest it and, depending on the investment markets, earn a rate of return. That doesn't mean you can't negotiate but the insurer will be conservative with good reason.
     
  12. Jobby

    Jobby New Member

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    Regarding tax, generally it will be taxed at the marginal rate though there are some policies where it is tax free. You could possibly request that the lump-sum be split over two tax years, however, I am unsure whether or not it would be possible.
     
  13. Jobby

    Jobby New Member

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  14. Patrico1966

    Patrico1966 Well-Known Member

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    They wont split it and you will be taxed on it- 2 things that are gospel. My advice is dont take the offer. Would you like to sit on that wage of $55k per year with inflation for the next 26 years? What is your current yearly wage? No brainer
     
  15. Jobby

    Jobby New Member

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    Depends on the situation. The insured could have a business or investment opportunity, potential job in an alternative field or could have a concurrent workcover or other claim in which case the insurance payments could be offsetting some other compensation payment. I do agree though that a lot of thought should go into the decision, no need to rush.
     
  16. Patrico1966

    Patrico1966 Well-Known Member

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    Yes, most certainly. The poster has not provided an overview of his situation to be able to make a call.