Income Protection insurance is about to make a change – for the worse.
The gold standard of income protection, has long been “agreed value” policies, and these have been the products that most advisers have recommended to their clients.
With agreed value contracts, the amount that you will receive when you go “on claim”, is agreed up front, at the time of taking out the policy, and is based on your income at the time of taking the policy out. This provides a high level of certainty of your cover. As Always, there is a catch. If the insurance company needs to (e.g. if it is losing money), then it can increase your premium (well, not just your premium but the premiums of everybody who has that sort of cover).
Over the last couple of years, insurance companies have faced mounting losses totalling over $4billion in the last 6 years on their income protection business. The regulator APRA has stepped in and told companies to raise more capital, and to STOP WRITING AGREED VALUE DISABILITY INCOME POLICIES.
The upshot is that insurers will now only be able to offer “indemnity-only” income protection. Therefore, only pay a percentage of your income at the time of claiming. Hence, if your income falls between taking out the policy and making a claim, your potential benefit will also fall.
COMMENT
This action is yet another sad commentary on the management of many financial services providers in Australia. Too often it is the regulator who forces changes, rather than industry members themselves.
ACTION
Now would be a good time for you to check the status of your income protection with your adviser.
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