Are you currently or moving towards self-employment? Do you receive a base salary but have fluctuating income with bonuses and commission? – this is a MUST read.
Recently, APRA has imposed sustainability measures on the life insurance industry with a particular focus on the income protection product due to significant industry wide losses over recent years. As of April 1, 2020, new ‘agreed value’ income protection policies will no longer be available in the market. This has significant ramifications for those who are self-employed or who are likely to become self-employed in the future, as well as those who have significant bonus portions to their income. Given its pertinence for many in our client base, we wanted to reach out to you to ensure that, at the very least, you understand these implications and ensure that any existing policies are reviewed or that you look to implement cover that will protect you in the long term.
What is the difference between agreed and indemnity?
To give you some context, there are 2 types of income protection policies – ‘agreed value’ and indemnity – and there is one fundamental difference.
Agreed value contracts are offered by insurers having seen a client’s recent history of earnings at the time of application and they ‘agree’ that they will offer a certain sum insured based on those earnings. In practice this means that in almost every instance, whatever the client earns in the future is irrelevant as the insurance policy will pay out whatever sum is in place at the time of a claim regardless of their earnings at that time.
An indemnity contract on the other hand does not require financials upfront but whenever a client goes to claim on that policy, they need to produce evidence of their recent earnings to justify the level of cover they have in place and are indeed paying for.
Indemnity contracts may be perfectly reasonable for PAYG employees with steady (and generally increasing) incomes but self-employed clients with potentially fluctuant incomes from year to year typically want the certainty that what they’re paying for is going to be received at claim time when and if they need it. They do not want to be exposed to the scenario where they have a period (before claiming) where they’re working a little less, have taken some time off or have just had a leaner period of earnings and for that to form the basis for an insurers payout figure. Moreover, many of our clients have ‘level premium’ policies in place for sustainable premiums and long term savings and the certainty of an agreed value contract over that time is extremely comforting.
For the reasons cited above, we believe that it’s important that you are made aware of this imminent development and have a chance to make any necessary changes to existing cover or implement new cover if nothing is in place. Also, be aware that any ‘agreed value’ policies in place before April 1 of this year will remain in place and can be amended in any way moving forward. If would like your cover reviewed, please give us a call 9415 1511 to have one of our insurance experts give you a complimentary review, or email us.