AFCA Income Protection Decision Highlights a Hidden Risk for Variable Earners
Why freelancers should look beyond the headline benefit amount
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A recent Australian Financial Complaints Authority decision has put a spotlight on a detail that can be easy to overlook: how an income protection policy defines income.
In the case, a policyholder receiving payments under an employer-arranged group income protection policy argued that regular sales commissions should be counted when calculating his pre-disability income.
The insurer, MetLife, excluded those commissions because the employer had selected a policy definition based on regular income, rather than a broader option that included regular commissions.
AFCA accepted the insurer’s approach, finding that the calculation followed the wording selected under the policy. While the dispute involved an employee and a group policy, the lesson is highly relevant for freelancers, consultants, sole traders and contractors whose earnings rarely fit neatly into a fixed salary model.
Many self-employed professionals have income that moves month to month. A designer may receive project fees, a consultant may earn retainers and success-based bonuses, a sales contractor may depend on commission, and a developer may alternate between intense contract periods and quieter gaps. If a policy only recognises certain categories of income, the benefit payable at claim time may be lower than expected.
For freelancers, the key issue is not simply whether income protection exists. It is whether the policy reflects the way the business actually earns money. That means checking how the insurer treats commissions, bonuses, irregular invoices, business expenses, director drawings, trust distributions and income split across entities. It also means understanding whether benefits are based on income at the time of application, income immediately before disability, or an average over a defined period.
This decision is a timely reminder to read definitions with care before relying on a headline cover amount. A monthly benefit that looks adequate on a quote screen may not perform as expected if the underlying income calculation excludes major parts of your earnings. Freelancers reviewing income protection options should look closely at policy wording, not just premium cost.
There is also a practical record-keeping message. Clean tax records, invoices, contracts and profit-and-loss statements can make it easier to prove income if a claim arises. Where income is complex or variable, speaking with a licensed adviser or broker can help identify whether a policy is suited to your working pattern. For self-employed Australians without sick leave, the right definition of income can be just as important as the insured percentage itself.
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Knowledgebase
Surrender Value: The amount of money an insurance policyholder will receive if they voluntarily terminate the policy before it matures.
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