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The education and experience of accountants, lawyers, medics and architects demand special protection strategies.
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Professional high earners need tailored insurance
19 August 2022
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The accounting profession is often a first port of call with high-earning individuals seeking guidance to protect their business, their forward revenue-earning capabilities and, ultimately, their overall wellbeing.
Many accountants are therefore the centre of influence with clients but also other professionals – like financial planners and risk insurance brokers – and so this article is a quick reference guide to help accountants manage their pivotal relationship function.
The income and career trajectory of high-earning professionals – including accountants and their clients – create its own challenges and complexities.
This is especially true in the context of life insurance, where the unique needs of professionals may require the use of strategies and solutions not normally relevant or available to non-professionals.
In terms of individual cover options – death, TPD, income protection and trauma – one of the fundamental issues is the ability to secure adequate coverage. Professionals frequently have higher coverage needs, but not all insurers and product offerings properly cater to this segment.
This is especially true of income protection, a class of product massively overhauled after an intervention by APRA, which mandated new limits on coverage and features in an attempt to shore up the sustainability of the category.
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Across the market, different insurers have interpreted these mandates differently, and wide variations can be found in terms of the replacement ratios (the maximum proportion of annual income you are allowed to insure) and maximum monthly insurable benefit.
Replacement ratios as low as 50–60 per cent are common with 70 per cent being the usual maximum, although many insurers reduce the 70 per cent for clients earning over a certain amount, which can be as low as $150,000.
Additionally, some products only allow a maximum insured benefit of $30,000 per month, which will be inadequate for many professionals. For professionals with annual incomes of $600,000-plus, more specialised products, allowing monthly benefits of up to $60,000, are more appropriate.
Some insurers also provide the option of a higher replacement ratio for the first six months of a claim (up to 84 per cent in the case of PPS Mutual), offering security and peace of mind well beyond mainstream products.
In terms of lump sum coverage, while many insurers claim there are no upper limits in reality, not all have an appetite or ability to handle jumbo cases – and it is worth working with a specialist unfazed by ultra-large sums insured.
The definition of disablement – as it applies to TPD and income protection cover – is another crucial consideration when putting in place a protection strategy for professionals.
The specialised nature of professional occupations and the years of highly specific education and experience that form the basis of a professional career, generally result in a much higher-than-average earning potential. When protecting this potential, a priority for professionals is to ensure any disablement claim is assessed against their ability to perform the unique aspects of their own, specific, occupation, rather than any non-professional roles they may be capable of performing.
This means seeking TPD and income protection options with an “own occupation” definition, rather than the cheaper but less generous any occupation definition of disablement.
This point alone is why group super disablement cover, often obtained on a default basis early in one’s career, is largely unsuitable for professionals (super funds aren’t allowed to offer own occupation cover).
Inside super or not?
On the topic of superannuation, decisions around life cover through super can be complex, regardless of whether that fund is an SMSF or public offer fund.
For starters, trauma cover and many value-add features across other products fail the sole purpose test and thus are only available in non-super guise.
And while the obvious cash flow advantages of paying premiums from existing super balances – rather than out of pocket – can be tempting (especially when larger premiums are involved), this must be weighed against the fact that premiums deducted from existing funds will erode retirement balances. Also, additional contributions specifically to pay for insurance premiums will count towards concessional contribution caps, severely limiting the ability to make extra contributions for investment purposes.
For professionals in a multitude of fields including, law, medicine, architecture and, of course, accountancy, private practice is the ultimate goal with professional partnerships being a popular business structure.
Such partnerships face their own challenges, including their ability to survive when faced with the loss of a partner due to death or disablement. Modelling published a few years ago suggested that in a firm of two partners there was a 35 per cent chance of one partner dying – and a 52 per cent chance of becoming totally disabled – before age 65. (In a three-person partnership the probabilities increase to 47 per cent and 67 per cent respectively.)
Business life insurance strategies
Strategies of relevance to professionals in private practice can include those for revenue protection purposes and ownership protection.
Revenue protection involves the use of life insurance to mitigate the loss of revenue due to the death or disablement of a key person within a business, such as a partner.
Products supporting such a strategy can include death/TPD and income protection options, as well as business expenses cover. Often written as an adjunct to income protection cover, business expenses policies can cover up to 100 per cent of those expenses that continue even while the insured is disabled.
Sometimes known as buy/sell arrangements, ownership protection involves the use of life insurance to create smooth ownership transitions – through the purchase of ownership shares – when death or disablement forces an owner to exit the business. (Such transitions can become mired in business-threatening acrimony if formal strategies are not in place.)
The deductibility of premiums and taxation of claims under revenue and ownership protection strategies can be complex, and depends on a number of issues including who owns, and who pays for, the coverage.
The final life insurance consideration for professionals – and one which reinforces the value of working with a specialist – is the availability of options and benefits that reflect the unique characteristics and milestones of a professional career. These include the ability to increase coverage, without the need for health evidence, upon achieving partnership status or entering private practice, indexation options tailored to professional revenue trends – rather than general community inflation – and generous provisions relating to sabbaticals and study leave.
Professionals work to achieve success. They owe it to themselves to protect that success as robustly as possible with specialised, quality cover.
Brian Pillemer CPA is director of distribution at PPS Mutual.
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