The Importance of Reviewing Indemnity Income Protection Benefits

Income protection is one of the most essential forms of insurance, particularly in today’s volatile and unpredictable world. Your ability to earn an income is your most valuable asset. It supports your lifestyle, provides for your family, and secures your future. Unfortunately, this asset is often overlooked until it’s too late. Reviewing your income protection benefits regularly is vital to ensure that the coverage remains adequate and aligns with your current circumstances, especially when it comes to indemnity-based cover.

Income protection policies provide financial support if you are unable to work due to illness or injury. The aim is to replace a portion of your lost income so that you can maintain your standard of living during a period of recovery. However, the coverage you chose when you first took out the policy might no longer be suitable as your life circumstances change. This is where regular reviews become crucial. For more information on the different forms of insurance you can get to protect yourself and your family, check out our article on Spousal Insurance for Doctors.

Income protection benefits are designed to reflect your income at the time of a claim. Over time, changes in your work circumstances, salary or tax status may mean that your income at the time of a claim is higher than the income you were earning when the policy was first established, therefore potentially being insufficient for your needs and causing a cash flow shortfall. Regular reviews ensure that your benefits are aligned with your current income, reducing the risk of underinsurance.

This is particularly important for individuals with indemnity-based income protection policies. Under indemnity coverage, the benefit payable at the time of a claim is based on evidence of income, and you must provide proof of income when making a claim. As such, it’s vital to regularly check whether your income protection remains appropriate for your needs, and whether any changes to your personal or financial situation could impact your benefit amount.  Just as it is important to ensure you are not underinsured, it is also important to ensure you are not over insurance under indemnity income protection.  

Prior to 1 October 2021, the income protection market allowed for both Agreed Value and Indemnity policies. Agreed Value cover was an advantageous option because it essentially guaranteed the benefit amount at the time of application, so you didn’t need to prove your income again should a claim arise for total disability (proof of income is always required under a partial disablement claim). This offered peace of mind, knowing that the benefits would remain consistent, regardless of changes to your income after the policy’s inception.

However, since the Australian Prudential Regulation Authority (APRA) changes in October 2021, all income protection benefits in the market are now indemnity-based.

This means that the benefit you receive is based on the income you are able to prove at the time of a claim, not what you were earning when the policy was established. As a result, should your income decrease due to a change in working hours or a reduction in salary, the amount you’re entitled to claim could be significantly lower than expected when compared to your salary when you took out the policy.

It’s common for doctor’s income to fluctuate over time. For example, you may take on part-time work, reducing your hours, or experience a salary cut due to various factors, such as a change in career, economic conditions, or personal choices. These changes may not always be reflected in your income protection policy unless a review is carried out and amendments made.

Additionally, policies often include automatic increases to cover inflation, known as indexation. While this is a helpful feature, it can lead to a mismatch between the policy’s coverage and your actual needs, especially if your income has reduced over time. If you haven’t adjusted your policy to reflect these changes, you may end up with coverage that is too high for your current circumstances, resulting in you paying higher premiums for benefits you may not fully utilise.

It’s important to keep in mind the tax treatment of income protection policies. Premiums for income protection insurance are generally tax-deductible, which can be a significant benefit for many individuals. However, this also means that any benefits received in the event of a claim will be taxable as income and you should be prepared for this.

This tax treatment can have a significant impact on the amount you actually receive and can affect your financial stability during a time of need. At DPM we have a team of medical tax specialists on hand to assist you with your tax needs in the event of an insurance claim. 

Given these complexities, it’s crucial to conduct regular reviews of your income protection policy to ensure that it remains relevant and adequate for your needs at the time of a claim, maintaining your lifestyle and covering any expenses during your recovery. A professional adviser such as a DPM Insurance Consultant can help you navigate the intricacies of the policy. This involves assessing whether your coverage is still sufficient, and providing advice on adjusting the policy if necessary.

Income protection is one of the most important forms of insurance that you can have. As circumstances change, so too should your income protection policy, and with the right guidance and regular reviews, you can ensure that your benefits are sufficient when you need them the most.

Regular reviews of your indemnity income protection benefits are not just a good idea – they’re an essential step in securing your financial future. Book in today for a free, no-obligation consultation with a DPM Insurance consultant to discuss how you can ensure your income protection remains in line with your evolving needs and circumstances.

Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.