Have you prepared for changes in income protection?
By Aurora Pham
With effect from March 31 2020, APRA expects insurance companies to discontinue issuing any new contract where insurance benefits are not based on income at time of claim, including Agreed Value income protection policies.
It’s often not until tragic things happen that people realise they are underinsured. Amidst the wake of the horrendous bushfires in Australia, the Insurance Council has released an alarming statistic – “a whopping 80% of us don’t have the right cover” for our household. Can the same be said for your income protection?
Why do I need income protection insurance?
People encounter unexpected problems that keep them from working. Income protection Insurance protects you by paying an ongoing monthly benefit if you are unable to work due to injury or illness. Especially if you are the main source of income in the family, it provides your family with peace of mind and ensures quality of life.
Without insurance, you may need to run down your savings, sell assets, or rely on family or the Department of Human Services for assistance. You may find it difficult to maintain your standard of living or pay for the care and medical assistance you need. This can place extra stress on your recovery.
Difference between Agreed Value and Indemnity Value Income Protection
Income protection benefits differ depending on the type of cover. Generally, when taking out an income protection insurance, you have two options: Agreed Value or Indemnity income protection.
An Agreed Value income protection policy is essentially a contract where you will receive the monthly benefit based on your initial financial evidence at the time of a successful claim. With an Agreed Value policy, you are required to provide proof of income during application stage to determine your insured amount and it will remain the same even if your income reduces in the future. This may suit you if you are a small business owner or your income fluctuates over time; you are able to substantiate your income and want peace of mind at time of claim.
An Indemnity Value income protection policy requires you prove your income at claim stage and the amount you receive would be based on your earnings in the 12 months prior to the injury or sickness. Even though the premium for an Indemnity policy is less expensive than Agreed Value policy, the claim process can take longer and if your income has been reduced since you applied for cover, you’ll receive a smaller benefit amount. An Indemnity policy may suit you if you have a stable income and can easily substantiate your income at the time of claim.
Agreed Value vs Indemnity Value Income Protection:
Agreed Value Protection
Indemnity Value Protection
Proof of income required
|When taking out a policy||
When making a claim
Amount of monthly benefit
|Fixed and based on your income at the time of application||
Based on your current income at the time of claim
In case of income reductions
|Your benefit amount remains the same||
You’ll receive a smaller benefit amount
|Self-employed people, small business owners and those with fluctuating income.||
People in steady employment
|Premiums||Higher than indemnity Value cover||
Lower than Agreed Value cover
What changes are coming to income protection?
Under the Australian Prudential Regulation Authority’s (APRA’s) new rules, there will be some changes set to primarily affect income protection policies issued after March 31 2020, among which Agreed Value policy will no longer be available on the market. For those who already have one before March 31, you can keep it, otherwise Indemnity Value policy is the only option left.
So, who will be most affected? – Anyone who has a fluctuating income will be the worst affected by the upcoming changes including small business owners, self-employed people because if they experience a downturn in their income over the 12 months leading up to a claim, the benefit amount will be reduced under Indemnity Value policy.
The information contained on this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
How can KMT Wealth help you?
Deciding whether income protection is right for you is a tricky one and if you’re already in the market for an income protection insurance policy, it’s important you consider whether it’s better for you take out an insurance policy now before these new changes take effect.
To create an independent and prosperous future, you need a plan. The best way to decide which type of insurance policy works best for you is determined by your needs, your occupation and what you can afford. Our KMT Wealth team works with you to identify your current financial position, your constraints and future wealth aspirations; assess threats and risks; create a safe journey to achieve your goals; monitor your affairs and guide you in your choices.
How you identify financial aspirations and select your journey is vital. For business owners, it’s important to build wealth outside of your business too. We design strategies to support this, as well as those to protect your after-tax wealth. To arrange an appointment with one of our financial advisers, please contact (08) 8431 0022 or email email@example.com