The world of a risk adviser is chock full of decisions that need to be made: Which insurer? How much cover? What type of cover? Self-owned or super-owned, trauma reinstatement, buybacks, waiting periods, benefit periods … the list goes on and on.
Perhaps one of the most frequent decisions we make relates to income protection and whether to recommend agreed value or indemnity cover.
Similar to own versus any TPD, and stepped versus level premiums, agreed versus indemnity IP seems to be a topic that inspires passionate debate amongst advisers.
Some advisers are big believers in indemnity cover whilst others recommend nothing but agreed value policies.
Up until fairly recently I believed that indemnity IP was good enough for most people, especially employees with stable income histories.
I was comfortable with indemnity contracts as long as pre-disability income was determined by looking at the previous 36 months.
I figured that three full years offered plenty of security, reasoning that a client could afford to have one bad year, in fact even two bad years, and still receive their full benefit.
When explaining the difference between agreed value and indemnity I would often ask my clients something like: “In reality, what are the chances of you having three years in a row of reduced income?” I would highlight how secure the 36-month indemnity definition was, and as a result, indemnity cover practically sold itself.
I only recommended agreed value cover to certain self-employed clients or those employee clients who had a high risk of fluctuating incomes.
Looking back, I realise I was probably worried about asking my clients to pay that extra 15 per cent or so in premiums.
I was so concerned about cost that I forgot to talk about value.
I didn’t take the time to properly explain why agreed value policies cost more. I didn’t explain the incredible peace of mind that they provide and I certainly didn’t highlight the underlying risks of indemnity cover.
If that sounds like you, please keep reading.
I’d like to point out why I’m now a fully fledged fan of agreed value contracts.
When I talk to my clients about income protection, I discuss many of the key points outlined below and I ask whether they would prefer the certainty of agreed value or the doubt of indemnity cover.
Long-term income reduction does happen – it is actually quite common – and there are many reasons for it happening.
Possible reasons for an extended decline in income (which would impact on an indemnity claim but not an agreed value claim):
- Stable employee clients may, in the future, move into self-employment in a related field. This happens a lot, and can very often lead to a substantial income drop that might take years to return to its previous level. In the early years of self-employment, clients often dip into their savings to supplement their reduced earnings.
- Clients in stable and well-paid roles may decide to change careers entirely eg. they may wish to go to university and study to be a teacher. These clients will not earn an income and in the new role may be earning far less than they were.
- Clients who receive redundancies and are then subsequently out of the workforce for an extended period of time, either through choice (career break), or perhaps due to circumstances (eg. they cannot find a new role at all or they are forced into taking a part-time job on substantially reduced income).
- Clients who are working in industries that fall into decline over time (possibly impacted by technological innovation), and thus are likely to earn less and less over time (eg video store owners).
- Self-employed clients are always at risk of their business income being reduced by a competitor who may attract clients by offering better products, better service, better price etc.
- High-earning clients, working in industries that see fluctuating income dependent on consumer trends (eg. real estate agents, solar panel sales representatives), or on other economic factors (eg. the mining industry), may see dramatic falls in income after being on relatively stable, high incomes for many years.
- Clients may decide to go part time, take extended maternity or paternity leave etc.
- A client’s employer may be forced to reduce costs in a tough economic climate by asking employees to reduce their hours voluntarily. This seems to be happening more and more.
- Clients may be forced to give up their careers or dramatically alter their hours (thus reducing their income) if a family member becomes very ill eg. a mum who might choose to give up her career if a child was diagnosed with a critical illness.
- Clients may see their work hours, job performance and income gradually affected as a result of a debilitating health concern that takes time to show its full impact. As the illness starts to take effect the client may take a lot of time away from work on an unpaid basis, reduce their hours and/or responsibility, which could have an impact on their income over time. Rather than going on claim, they may struggle through, perhaps in denial (which often happens in the case of mental health concerns). This gradual decline in health could eventually result in a claim, however the claim may be reduced if the pre-claim income had been declining. An agreed value policy would be very valuable in such circumstances.
In many of the circumstances noted above there is not only the risk of decreased income but there may in fact be an increased likelihood of actually claiming as a result of stress/depression/anxiety as the client struggles to cope with their reduced income and associated alterations to their lifestyle, marriage problems etc.
Richard Monroe is a former BT Senior Life BDM and is now a specialist life insurance adviser and director at LFC Financial, based on Queensland’s Sunshine Coast.
Richard I fully agree with you, I have been selling Income protection polices for over 30+ years and have always mentioned the differences. The above reasons can also be applied to the waiting period. how long to extend??….when talking to clients with work based IP they may have a 2 year benefit. so the strategy was to dovetail a ‘to 65 year’ policy with a 2 year wait. BUT what if – according your dot points the same reasons apply to having a shortened wait period.. although it becomes a over insured in the cross over …so more decisions need to be made. I go for the initial over insured, just in case….because i have a client where he was put in a worse position… this is where the value we add becomes apparent.