income protection insurance policy

Question; income protection insurance policy

Following your advice a few years ago, Paul Sandilands took out an income protection insurance policy which provided for indemnity cover equivalent to 75% of his earnings payable monthly in arrears. Unfortunately, about 3 months ago, Paul was injured in a workplace accident and is only now getting back to full physical fitness. Prior to his accident, Paul’s before-tax monthly income was $5,000 ($3,800 after-tax). Paul is feeling bored staying at home and is considering going back to work on a part-time basis (3 mornings per week) as long as he is better off financially from doing so. His employer has offered him a before-tax monthly salary

of $2,500 ($2,100 after-tax) if he goes back to work part-time.

Required

(1) Calculate Paul’s monthly claim under his income protection insurance cover if he decides not to take up the offer to return to work on a part

-time basis.

(2) Calculate Paul’s monthly claim under his income protection insurance cover if he decides to take up the offer to return to work on a part-

time basis.

(3) Is Paul financially better returning to work on a part-time basis? Provide relevant calculations to justify your response.

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