I wrote
a blog in December last year about how difficult personal risk insurance (e.g. income protection, Life and TPD) is becoming to obtain. Also, in December, the government directed Australian insurers to make some very significant changes to their products. I have been waiting to measure the insurers response to these directives. These changes will have a significant impact on your future insurance options.
What is currently offered
Before I discuss the changes that the government has asked for, it’s important to appreciate the status quo. Most income protection policies have four main variables:
1. Benefit amount
This is the amount of income you are insured for. Most insurers allow you to insure up to 75% of your current gross income (not 100%, otherwise there’s little financial incentive to return to work). Benefit amounts are typically expressed as a monthly amount. This monthly benefit is taxed at your marginal tax rates – so a $10,000 benefit will result in an income of circa $7,140 per month after tax.
2. Waiting period
This is the period of time you must be incapacitated for before you are able to claim a benefit from the insurer. Typically, the options include 30 days, 60 days, 90 days, 6 months or 2 years. Often, the most economical wait period is 90 days. Benefits are paid one month in arrears. So, a 90 day wait period means you won’t receive any income for 4 months.
3. Agreed or indemnity
If a policy is agreed value, it means that if you become fully incapacitated, you will receive the benefit irrespective of the level of your income prior to you becoming incapacitated. Therefore, someone could have an agreed value policy for $10,000, subsequently become unemployed and then have an accident and they will be paid the full benefit.
Alternatively, an indemnity policy requires the insurer to measure your level of income in the period prior to you becoming incapacitated and pay the lesser of up to 75% of that amount or your insured benefit. This means, if your income was nil, you would not receive a benefit, despite paying the premiums for insurance cover (I elaborate on this further below).
4. Benefit period
The benefit period is how long you will receive a benefit for whilst you are still fully or partially incapacitated. Given we want protection against l
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