Feb 27, 2020  | Tags: Insurance, Life Insurance

Our Insights

As part of the ongoing changes in our industry, our insurance industry regulator, is imposing changes to income protection policies to make the policies more sustainable.  Whilst there are many proposed changes which are currently under review, the first step being imposed is the total removal of agreed value contracts from 1^st April, 2020.

What is Agreed Value?

Agreed value means locking in your monthly benefit based on your income at the time of taking at the policy.  This means that if your income reduces in your future, for one reason or another, ie change of occupation or reduction of hours, your monthly benefit will be paid on the agreed value benefit in the event of a claim.  Therefore from 1^st April, 2020 the only new policies that will be available will be on Indemnity basis only.  This means that in the event of a claim, the benefit payable will be the lesser of your monthly benefit, or 75% of your pre-disability income. 

Who will be affected?

If you already have an agreed value policy there will be no change to your existing policy.  There is still uncertainty however as to what rules will apply to making changes to these policies after 01/04, ie ability to increase sum insured, change waiting periods etc...These may vary between insurers.

Self Employed

• Unlike employees who are guaranteed their income with their salaries likely to increase each year, self-employed people can have fluctuating income from year to year.  If they took out their income protection on indemnity basis, and were to become ill or injured after a bad year, than the monthly benefit would be payable based on pre- disability income for the life of the claim.  This could be financially devasting if they were unable to work long term.

Example – Michael is a builder who runs his own business earning around $150,000 per year for the past ten years.  He takes out an indemnity based income protection policy for $9,375 per month which is the maximum sum insured available to him based on his current income. A few years later there is a slump in the building industry and Michael’s work has diminished. His income for the past two years decreased to approximately $90,000 but he knows things will start picking up again soon.  Michael then falls off a ladder on a job site and fractures his spine, requiring surgery and immobilisation for quite some time.  Michael claims on his income protection cover and receives $5,625 per month (75% of pre-disability income).  If Michael had taken out an agreed value contract his monthly benefit would be $9,375 per month, regardless of the drop in Michael’s income.

Thinking of becoming Self Employed?

• If you are currently an employee who is thinking of going out on your own in the future, then now is the time to lock in your current income on agreed value. 

Example – John is a plumber who completed his apprenticeship 3 years ago and is currently working for the same employer, ABC Plumbing.  John is earning $80,000 per year and his plan is to work with his employer for the next 5 years to gain more experience, and then start his own business.  During this time John’s income will likely increase.  Once John starts his own business may take a couple of years to get going.  It would be a good idea for John to take out an agreed value policy now which will protect him for his current income in anticipation of a possible reduction of income in future.

Planning to start a family?

• If you are an employee and plan on taking time off work to start and grow your family, now is the time to lock in your income!

Example – Melanie is a 28 year old lawyer who works as an employee earning $90,000 per annum, which she anticipates will be increasing over the next few years.  Melanie and her husband Paul intend on starting a family within the next five years.  The plan is for Melanie to take twelve months maternity leave and then return to work part time until the children start school, at which point she will then return to work full time.  It is a good idea for Melanie to take out an agreed value policy now so that she is covered for her current income whilst she is on Maternity leave or working reduced hours (and therefore earning less).

Earning Bonuses or Commission

• Did you know that If you are an employee and earn bonuses or commission consistently you can insure this income too?  This may be a good time to lock it in!

Get Advice

Talk to the team at Calder Wealth Management. Call us on (08) 8373 3333 to schedule your free initial appointment.