Toolbox: Income replacement: recipe for a good night’s sleep

Advisers are often so busy looking after their clients’ best interests that they forget to adequately take care of their own, especially when it comes to protecting their income against disability.

Advisers are in a fairly unique situation when planning their own income replacement cover. Unlike most occupations, where loss of earnings start when the disability occurs (or soon after, when available sick leave runs out), an adviser’s renewal or trail commissions are likely to continue and accrue for some time after the onset of the disability.

Working out how this will be treated at the time of claim is really a matter of structuring your cover to reflect the objectives and definitions of the policy. And as with any income protection plan, you need to review your own situation in line with the two guiding principles of disability insurance, namely:

1. To provide protection against a loss of income in the event of sickness or injury; and

2. To offset income generated as a result of personal exertion during the period of claim.

Protecting against loss of income

If you’re unlucky enough to be struck down with a disability, the most immediate consequence will be that you won’t be able to complete new applications or actively prospect for further business.

True, your new business commission may continue to trickle through as proposals in suspense complete, but most likely you will immediately notice a reduction in this type of commission. And your ongoing business expenses, such as rent and car/equipment leases, will continue to add up.

With more than 60 per cent of claimants returning to work within four months, it is unlikely you will suffer a reduction in renewal commission in the event of a ‘typical’ claim. But what if you were off work for more than a year and not in a position to conduct your reviews? Would you be able to hold onto the business or would someone else step in for you and write it somewhere else?

Income from personal exertion

You only get paid when a proposal completes. Accordingly, any new business commission received from business submitted prior to your disability isn’t offset at the time of claim because all the personal exertion took place before you were disabled. While renewal commission is clearly a form of revenue, it would be unreasonable to try and attribute any personal exertion taking place within the period of a short-term disability to justify treating it as ‘post disability income’.

Getting the best coverage

All things considered, the most appropriate solution for advisers is to:

1. Insure your new business commission, net of business expenses, on a short waiting period.

2. Match this with a business expense policy with a similarly short waiting period.

3. Insure renewal commission on an extended waiting period, such as 365 or 730 days.

And take note of the advice you give clients: don’t just think about getting the best coverage…do it!

Michael Richardson is life protection claims manager, Zurich Financial Services Australia .