Special Information Alert for Sapience Clients - the end of new Agreed Value Income Protection insurance
There are some very important changes coming to Income Protection Insurance that will affect those who don’t yet have appropriate cover in force by the beginning of April 2020.
Warning: You need to be aware of these changes as you risk losing a very significant opportunity to protect your greatest asset – your ability to continue to earn your income.
Read in this article
- A quick reminder about - how Income Protection insurance works
- A quick reminder about - the difference between Agreed Value and Indemnity Value income protection policies
- What’s changing?
- What will be the impact?
- An example of Agreed Value Income Protection at work
- Some important features for Agreed Value Income Protection worth considering
- What if I already have Income protection in place?
- What does this mean for you?
- Why should you care?
- It's in your best interest to consider the effect of this change carefully
A quick reminder about - how Income Protection insurance works
An income protection insurance policy allows you to;
- insure up to 75% of your personal earnings/income (and employer super contributions) if you're sick or injured and can't work.
- You can be paid 75% of your agreed amount of income until you recover or until you retire at age 65 - whichever comes first.
A quick reminder about - the difference between Agreed Value and Indemnity Value income protection policies
Agreed Value contract wording means:
- regardless of changes in your income level, or changes in your employment, or changes in your health - if you are on a claim you can be paid the agreed amount of income for the agreed length of time. (often till age 65, or even 70 for some professional occupations).
- if you already have your agreed value IP policy in place and you've changed jobs or have a lower income and need to make a claim on your policy, you can still get paid the original agreed amount of income replacement - even if your circumstances have changed and you're being paid a significantly lesser amount.
Indemnity Value contract wording means:
- you can only be paid the lower of either the insured amount or the average of your last three years of income. (If you've had time off work, now have a lower wage or working reduced hours, your benefit amount will reduce accordingly).
What’s changing?
Up until now, Agreed Value Income Protection insurance policies have been Guarantee Renewable.
This means that regardless of any unforeseen changes in your occupation, income or health, your policy could not be canceled on you by the insurance company.
- From April 2020 Life Insurance companies can no longer offer new Agreed Value Income Protection policies. This is just one of many new changes being imposed by the government regulator APRA.
What will be the impact?
These changes will reduce the length and quality of available income protection to all new policyholders after April 2020.
- All new Income Protection policies will only be Indemnity Value contracts and pay a maximum of 5 years of claim payments.
- Life insurance companies will now be able to:
- reassess your income level and your occupation type, every 5 years.
- change the terms and conditions of your policy, every 5 years
- change the definition of disability, every 5 years
- make it harder to claim in the future and harder to claim for longer-term sickness and disabilities.
An example of Agreed Value Income Protection at work
John is 35 and worked as a Team Manager of a Construction company doing desk duties on a fixed income of $150,000 pa.
He has an agreed value income protection policy that will pay him 75% of his income, $112,500 pa., if he's sick or injured and cannot work and on a claim, until age 65.
- That means over a long term claim that could last for 30 years (till age 65), John could expect to be paid up to $3,375,000 from his insurance policy, if he was unable to work due to sickness or injury.
- He hopes he will never need to use it but it provides peace of mind he will be able to continue to pay the mortgage and his novated lease on his car if he ever lost his ability to earn his income.
John later changes jobs, reduces his income to $80K pa., and becomes a traveling Sales Manager visiting different work sites and making some deliveries.
Even though he now has reduced income and a higher-risk job, he still has his Agreed Value IP policy that will pay him the originally agreed amount of income, $112,3,500 (ie: 75% of his original wage) if he is sick or injured and cannot work.
- The new government ban would prevent John from taking out this type of policy after 31st March 2020.
Luckily John already has an agreed value income protection policy in force that is guaranteed renewable.
This means his policy cannot be taken away from him as it's already in place.
Some important features for Agreed Value Income Protection worth considering
Your greatest asset in life isn’t your house or superannuation, it is your ability to earn an income.
Over a working lifetime of 40 years, the average Australian can earn a small fortune – about $3 million.
- More homes are lost through disability than through fire or natural disasters.
- Your statistical chance of needing to claim on your income protection policy is about 1 in 4. (and your life insurance is 1 in 10)
- Income protection premiums are tax-deductible, effectively discounting your premiums by 19%-47% depending on your level of income and can be partly paid from a combination of super and personal payments.
- The default income protection cover offered by your super fund is usually low-quality group insurance and nothing like the more comprehensive policies offered outside of super
What if I already have Income protection in place?
Existing customers who currently have an Agreed Value Income Protection insurance will not be affected and can still vary their benefit, including changing their sum insured (both increase and decrease), or replacing that insurance with a new Agreed Value Income Protection policy (for example for ownership reasons).
What does this mean for you?
- If you have an Indemnity Income Protection policy in force, I suggest you urgently consider whether to need to upgrade to an Agreed Value policy ASAP.
- If you don’t have any Income Protection insurance in place (or have been putting this decision off) I suggest you urgently consider whether to need to reassess your situation and establish an Agreed Value policy ASAP.
- If you’re uncertain if you can qualify for income protection, please contact us urgently with your age, annual income level and type of job. For people with complex health needs, we have a solution for you too.
Why should you care?
- Once the legislation is in place, you will only be able to insure your income with certainty for 5 years.
- Once the legislation is in place, you will then be exposed to any unforeseen changes in your health, income and occupation and may not qualify for income protection insurance cover again.
Another way to see the potential impact of this change is to ask yourself this question: If you are unable to get travel insurance, would that change the types of places you'd travel to? Alternatively, if you were only able to use Medicare and private health insurance for a maximum of 5 years, how would that change your certainty about your future and the security of those who depend upon you?
It's in your best interest to consider the effect of this change carefully
Please do not ignore this important change to Income Protection and its effect of limiting your ability to protect your capacity to continue to earn your income past 5 years.
You must take action by the end of March 2020 otherwise you will lose a significant level of protection that Australians have been relying upon to safeguard their future.
Contact us by email or call us directly today to better understand your personal situation and the situation of younger adult children who may be just starting out in the workforce.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
