The Income Protection industry is beginning to change, Starting with Agreed Value Income Protection & Policies.
Over the past 5 years, the collective Australian Life Insurance industry has lost over $3 billion in claims relating to Income protection (IP) contracts.
To stem this bleeding the Australian Prudential Regulation Authority (APRA) has acted and unveiled a series of reforms to IP offerings that aim to address the flaws as they see them in IP product design and pricing.
The changes APRA intend on making to income protection products will come into effect at various dates in the coming years and although many are still subject to change with APRA engaging industry to discuss their implication one thing is for sure and that is the removal of Agreed Value Income Protection products being offered as of 31st March 2020.
What has APRA Recommended for Agreed Value Income Protection?
“With effect from 31 March 2020, APRA expects that life companies discontinue writing IDII contracts where insurance benefits are not based on income at the time of claim, including agreed value (and endorsed agreed value) contracts”
What exactly is an agreed value IP policy?
Briefly speaking, an Agreed value IP policy is one where the benefit payable is guaranteed or endorsed prior to the claim, essentially locking in and guaranteeing the benefit payable for future claims.
This is distinct from the alternative which is an Indemnity value policy where the benefit payable is based on income at the time of the claim or in the best case definition of this type of policy, the best 12 months income of the previous 3 year period.
Why remove Agreed Value Policies?
Putting it simply, it was APRA’s opinion that Agreed Value products were simply too good, especially for individuals whose income varied from year to year such as those self-employed.
This is because assuming you’ve met the definitions outlined in your policy, you’d be entitled to receive the benefit payable, regardless of whether your income had dropped since it was originally endorsed.
At Yield, we have often advised clients to lock in their benefit on an Agreed Value contract for exactly this reason.
It provides a wonderful degree of security and control for the insured to underpin their financial plan more broadly and to ride out the variables in life, like periods of unemployment or short term fluctuations in income.
However, APRA’s concern lies in the fact that this can create a moral hazard for the insured where it could be argued that the insured could be incentivised to either fraudulently claim as doing so could place themselves in a better financial position or at least it disincentivises those on claim from returning back to work, ultimately costing the industry in the long run.
These types of situations also appear contrary to what insurance products are inherently designed to do, and that is to restore the insured back to a position which is comparable to where they would have been had they not suffered the loss, which in the case for income protection is to replace the portion of the income lost due the insureds inability to work due to illness or disability.
Although the elimination of Agreed value policy products would logically tie up this loose end, it does leave the industry to only offer indemnity value only products, which may not be ideal for some individuals.
We expect those most likely to be affected by this change to be the following:
1. Those whose income fluctuates from year-to-year such as business owners;
2. Those who intend to take extended leave or undergo further education; and
3. Those that choose to take a step back in their career in the short term, with full intent to resume working with their current earning capacity in the longer term.
What if I already have an Agreed Value Income Protection Policy?
Already have an Agreed Value Income Protection policy and worried about how these changes affect you?
There’s no need to worry as you’ll be comforted to know that your policy will be grandfathered and therefore not subject to these changes.
This means you’ll still be entitled to continue maintaining and amending your policy on agreed value terms just as you currently can.
Given they will no longer be available from April however, you should be very aware of the value of this policy and only cancel it when you are sure it is the right thing to do in your circumstances.
What if I’m thinking of applying for Income Protection Insurance?
If you currently don't have Income Protection insurance and contemplating applying for cover or feel that your current cover is inadequate to meet your need and concerned about how these changes may affect the quality of products available going into the future, the team at Yield are insurance experts who can provide a review of your situation and determine an appropriate insurance product suitable to your need. Contact us here.
Looking towards the future
As APRA’s Sustainability measures for individual disability income insurance letter details numerous changes that are expected to take place over the coming years and these are still subject to change, the Team at Yield will continue to monitor industry developments to ensure our clients remain up to date.
Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Yield Financial Planning is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published.