The income protection carrot and stick

Col Fullagar

27 May 2026

The primary purpose of income protection insurance might be stated as to assist in the protection of the lifestyle of the insured and their family if the former is unable to work due to the impact of a sickness or injury.

The word “assist” is deliberate in so far that there are other products such as Total and Permanent Disability and Trauma insurance that may also contribute. Further, over the last few years the reduced proportion of earnings that can be covered under income protection insurance almost inevitably means there will be a lessening of lifestyle if the claim period is prolonged.

The word “primary” is also deliberate because there is a secondary purpose and that is to encourage the insured to return to work if it is medically possible for them to do so. This return might equally be in their previous or a new occupation.

When it comes to “encouragement” there is of course a well-known metaphor of the carrot and the stick which alludes to motivational or positive encouragement – the carrot – versus a disciplinary or negative approach – the stick – to achieve the desired outcome.

In fact, many of today’s income protection insurance policies include both

The Carrot

An example of the carrot is the inclusion within income protection insurance policies of a partial disability benefit. Without this benefit an insured on a total disability claim would have little incentive to return to work in a reduced capacity as it would result in the immediate termination of the claim.

Thus, the design of the partial disability benefit is such that the insured’s part-time earnings when added to the partial benefit payment will always be greater than the total disability benefit. The carrot is financial advantage.

Another carrot within many income protection policies is a benefit that encourages by way of reimbursing the costs incurred in undertaking a rehabilitation programme. An example:

“This benefit reimburses the cost of an approved Rehabilitation Programme that assists in the effective rehabilitation of the Life Insured to return to work. Payment is subject to our approval of the expenditure prior to it being incurred.”

The key takeaways are that the focus of the rehabilitation programme must be to facilitate a return to work, and to this end, reimbursement is subject to the in advance approval of the insurer.

A pragmatic question arising out of the above is …………

What is Rehabilitation?

A Google search will reveal different types of rehabilitation including:

• Criminal
• Alcohol, drug and substance abuse
• Degradation of land, and so on.

The main ones, however, associated with income protection insurance are rehabilitation subsequent to surgery, sickness, injury and psychological breakdown.

A complexity in the practical application of rehabilitation benefits is identifying what is a rehabilitation expense as distinct from a medical expense as the latter cannot be paid under life insurance policies by virtue of the machinations of the National Health Act and the Private Health Insurance Act.

A simplified distinction is:

• Medical expenses are those that have as their primary focus the maintenance of the patient’s health, the returning of them to good health or the slowing of their medical decline, whereas
• Rehabilitation expenses are those that have as their primary focus the restoration of, or compensation for, the patient’s functional ability, lost as a result of surgery, sickness or injury.

The main rehabilitation types are:

• Physical therapy which assists in the restoration of the patient’s muscles, bones and nervous system by the use of heat, cold, massage, ultrasound and exercise either with or without equipment
• Speech therapy which assists the patient to correct residual speech disorders by way of strengthening the muscles involved in speaking, for example saying words, opening and closing the mouth, exercising the tongue, etc.
• Occupational therapy which assists the patient to regain the ability to undertake day to day tasks associated with work and home life. The focus may be the restoration of previous skills or the teaching of new skills. Therapy may involve the use of adaptive equipment at home or at work and/or the use of braces and/or otherwise aids to support the limbs, torso, etc.

The duration of a rehabilitation course could extend from several weeks to, in some cases several years.

The costs of rehabilitation can be considerable with the main ones being costs associated with the course itself which may include accommodation costs, and travel to and from the course. Whilst total costs vary depending on the length of the piece of string, in some instances they can be measured in the many tens of thousands of dollars.

Contractual Challenges

The rehabilitation road within income protection insurance is not without its challenges.

In the past, some claimants have taken a position of “the policy is there to pay me if I cannot work in my own occupation – nothing more, nothing less”.

This attitude may arise out of a sense of entitlement or a lack of trust of the insurer’s motives, for example a concern the insurer is trying to “force” them back to work no matter what. Whatever the reason the result has likely been a contribution to the previous poor claims experience of the product.

Other, and more pragmatic challenges might include if rehabilitation is to a different occupation will that later be deemed the new Own Occupation against which any new or even recurrent sickness or injury will be assessed.

Factors relevant to the success or otherwise of rehabilitation include:

• Severity of the claim condition
• Time from sickness or injury to commencing of rehabilitation
• Age of the claimant
• Availability of suitable full or part-time work
• Geographical restrictions, for example available options in the city versus country

Also, crucial are:

• The setting of realistic outcomes
• The support of the treating doctor, and most of all
• The attitude and commitment of the person undertaking the rehabilitation

The Stick

Whilst acknowledging the contractual carrots associated with rehabilitation and obvious advantages to all parties if it is successfully negotiated, over recent years income protection insurance has also included several sticks to further “encourage” engagement.

Indicatively, these come in two forms.

• Exclusion clauses

For example:

“We won’t pay a benefit if the life insured unreasonably refuses to undergo the medical treatment including rehabilitation to treat their condition as recommended by their medical practitioner”

The key word is “unreasonably” which is assessed by, you guessed it, the insurer.

• Disability definitions

For example:

“Totally Disabled means the life insured meets all of the following criteria ……. (including) …… is actively participating in a rehabilitation or retraining programme”

This particular policy later includes a lengthy definition of “actively participating ….” which in part states:

“ ….. the Life Insured is actively engaged in a rehabilitation or retraining programme they have the capacity to undertake, and which is designed to create a pathway to return to their primary occupation or, if this is unlikely, a pathway for any gainful occupation they are suited for by their education, training or experience ….’

The clause goes on to set out the numerous requirements if the claimant stops participating in the programme on the advice of their treating doctor and “If the Life Insured completes a rehabilitation or retraining programme but has not returned to a gainful occupation, we will work with the life insured to determine whether an additional rehabilitation or retraining programme could assist.”

Questions arising include:

• How will “actively participating” be assessed
• How will “capacity to undertake” be assessed
• Will assessment of both the above be flexible if claim symptoms vary in severity, duration or frequency
• If the claimant completes a programme but no suitable work is available, will they be assessed as capable of working and benefits adjusted notwithstanding, and the major clanger
• Will claims assessors be technically capable of undertaking the assessment of any or all the above.

It is also relevant to make the point that the above contractual extracts are only two of no doubt many and varied others that exist which space will not enable to be identified and discussed.

Whilst the desired behaviour of encouraging the claimant to return to work if medically possible and in line with their capability might be seen as reasonable, one might also reasonably question whether there are sufficient safety nets in place to bring the potential for getting it wrong down to an acceptable level.