Mental stress may be covered in income protection policies

As many of us scramble to see what government benefits and subsidies are available to help us get through this period, some are also checking their insurance cover to see if there are any benefits available there as well.

Insurers and advisers have reported a spike in inquiries about income-protection insurance policies with the main question being does it cover redundancy. The answer depends on your personal circumstances and how you hold the policy.

Wayne Leggett, a financial planner at Paramount Financial Solutions, says: “As soon as the world went pear-shaped, clients started to reach out and ask if their income-protection policies covered redundancy.

“The answer is ‘not as such’. ­Income protection is an accident and sickness policy. It pays a monthly benefit if you cannot work due to injury or illness, not due to the event of losing your job.

“However, there are a couple of insurance companies that offer a temporary redundancy benefit. If you’re laid off you don’t get a payout, but your premiums are waived for three months.”

In other words, income protection provides a benefit based on meeting a medical definition of ­illness or injury, rather than a situational definition such as redundancy or loss of business income.

However, there is some overlap between medical and personal circumstances with regard to making an income-protection claim. Importantly, income protection covers both physical injuries and mental illness. Life insurers have lost billions of dollars in claims in recent years on income protection. It seems many people have gone to the doctor after losing their job, got a note saying they have suffered anxiety, depression or stress and then been successful in claiming on their ­income-protection policy.

Troy Pearsall, associate financial planner and head of wealth protection at Elston Wealth, says: “We have seen significant claims under the umbrella of mental health for anxiety, stress and ­depression as trigger events. ­Although redundancy is not a claimable event in itself, it may result in mental health issues, which would lead to a claim.”

The situational stress could be anything: the breakdown of a marriage, a death in the family or loss of employment. Although these are not claimable triggers, if mental health issues ensue that prevent the ability to work, this may be sufficient for a claim.

Pearsall notes that it is important to be aware of what structure you use to hold your income-­protection policy as there may be restrictions on making claims.

“If you hold income-protection insurance inside super, there are stricter rules that apply, with the main one being the requirement to be gainfully employed at the time of the claim event.

“If a mental illness event is suffered and the insured person is not employed, they are not eligible to claim on the income-protection policy. It is a legislative requirement and insurers have no discretion over this.”

This rule came as a result of a 2014 change in super regulations requiring you to be gainfully employed at the time of claim and then cease gainful employment before the insurance benefits start being paid. The definition of gainful employment is employment or self-employment “for gain or ­reward in any business, trade, profession, vocation, calling, occupation or employment”.

Consequently, if someone is unemployed or on unpaid leave and wishes to make a claim on a super income protection policy, it would be denied on the basis they cannot cease gainful employment in order for the benefit to start as they are already not working.

The only caveat to this is if a person was made redundant but made a claim under mental illness before their final day of employment. This would then be considered by the insurer. Also important to note, the employment rule does not apply to income protection policies held outside super.

Pearsall also encourages people to contact their insurer if they are struggling to meet premiums.

“Where a client has been ­financially impacted due to the coronavirus in a severe way, we have approached their insurer to see if they would provide any goodwill relief around waiving premiums: we recently had success in gaining a client a three-month premium waiver.”

Although some life insurers are putting COVID-19 exclusions on new policies, most existing policies will provide coverage for coronavirus-related medical claims, but check your policy schedule or contact your adviser for claims under infectious diseases events.

Although income protection insurance does not cover situational events such as redundancy, it is good to know that if there is a genuine mental health impact that prohibits you from working, there may be a potential claim to be made under an income-­protection policy.