Is this the end of ‘agreed value’ income protection policies as we know it?
Recently, the Australian Prudential Regulatory Authority (APRA) has begun an intervention in the income protection market. The initial focus of this intervention has been around “agreed value” income protection policies.
What does ‘agreed value’ mean?
Essentially, if your income protection policy is an agreed value it means that in the event of a claim, you would receive the agreed value determined at the time of your application as a benefit as opposed what you are earning at time of claim.
Why are changes being made to agreed value policies now?
Over the last few years, income protection policies have seen unprecedented rises in premiums. Regardless of which insurer is behind your policy, this phenomenon has happened across the entire Australian sector and was largely due to dramatic increases in the number of claims. In fact, the findings showed astonishing and unsustainable losses in excess of $3 billion in the five-year period September 2019, with $1 billion of those losses in the final 9 months.
As a result, the Australian Prudential Regulation Authority (APRA) had no other choice but to intervene.
To make the industry more sustainable, they require that insurers re-align policy terms and conditions more closely to the concept of indemnifying policy holders for their losses.
If you hold an existing ‘agreed value’ policy then the changes don’t apply. Existing agreed value policies remain agreed value and will do so until you choose to enter a new contract. If you don’t have an agreed value policy in place, there will be several changes to the income protection policies available to new policy holders in the coming months.
What are those changes?
The most immediate change will be that agreed value income protection policies will no longer be offered as new contracts from 1 April 2020.
The removal of agreed value policies (vs indemnity) is most likely to impact those who:
- experience fluctuating income (which can often be the case in the medical profession e.g. locums),
- are expecting to undertake a fellowship, or
- are expecting to take an extended leave – including extended parental leave and unpaid sabbaticals.
Further changes will also be implemented prior to 1 July 2021 in relation to ancillary benefits available within certain products and the duration of policy contracts.
It is important to note that existing policies, whether agreed value or indemnity, will continue to operate on their current terms and conditions.
What do you do with this information?
If you currently hold an agreed value income protection policy and are comfortable that the monthly benefit is reflective of your income and needs, then you may not need to take any action.
If you are concerned about how these changes may impact your present or future situation, we strongly recommend that you talk to your insurance adviser and go through a complimentary complete review of your existing income protection policy right away.
Still unsure whether you need it? Here’s a quick scenario guide.
You should book an appointment or chat with your/an insurance adviser if:
- you currently hold an agreed value income protection policy and are not sure that the monthly benefit is reflective of your current income and ongoing needs,
- you currently hold an indemnity income protection policy and are concerned about the impact of the changes and therefore wish to explore a switch to an agreed value policy, or at least understand whether it may or may not be suitable for you, or
- you don’t currently hold any income protection policy and would like the option to explore whether an agreed value policy income protection policy may be right for you before it becomes unavailable.
Author: Jan Humphries, Compliance Consultant, DPM Financial Services
Disclaimer: The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.