October 2021 promises to be busier than usual for advisers and insurers alike, with several major regulatory changes taking effect. These include the new Design and Distribution Obligation (DDO) regime, and the latest APRA-driven changes to individual disability income insurance (IDII) contracts, affecting many factors including replacement ratios (with the maximum dropping from 75 per cent to 70 per cent), definitions of disability and the assessment of income at claim time. These changes are likely to see significantly different products to those we have currently.
Given the vast majority of IP claims are under 12 months, the core value proposition of income protection remains very much intact.
Income protection remains the most claimed upon of all life insurance products simply because the likelihood of a person being temporarily unable to work because of injury or illness is, unfortunately, quite high. And for professional clients in particular, 70 per cent of income as an insured benefit remains a vastly superior scenario compared to the alternative — relying on savings or Centrelink benefits, or financial help from family and friends.
Whilst we are yet to see these changes — and their longer-term impact on premium rates — play out in the market, one outcome I am certain of is a renewed appreciation of the role for business expenses cover.
Business expenses cover will become even more critical
Business expenses could almost be called the “forgotten cover”. Considering that most income protection policies are sold to self-employed business owners, I have always been surprised at how few of these policies are sold in conjunction with a business expenses add-on.
As many business owning IP claimants find to their detriment, fixed business expenses continue even when their income stops. And, contrary to what some business owners believe, business interruption insurance doesn’t cover this scenario at all.
Wages, rent, utilities, equipment hire costs — they all need to be paid even when the business owner can’t work. Without business expenses insurance — which can cover up to 100 per cent of eligible fixed business expenses — claimants are forced to dip into their income protection benefits to meet those continuing expenses. Not doing so could put them at risk of being evicted, seeing equipment repossessed, losing valued staff and even their clients.
Ultimately, they could be forced to close their doors.
With maximum monthly benefits set at a maximum of 70 per cent, claimants who are forced to put some of their claim benefits towards propping up their business will have even less to pay for their own day to day living expenses (including rent/mortgage, food, car loans, school fees, and credit card bills just to name a few).
You could say that without business expenses cover, the benefits of income protection are eroded, potentially significantly.
Imagine a doctor who owns their own practice, generating an income of $25,000 per month, from which comes $7,000 in business expenses, including the wages for an office assistant, rent, phone, internet, and equipment leasing. The remaining $18,000 is drawn as a monthly salary.
A cycling accident sees them break their arm in several places, leaving them unable to work for around three months.
Without business expenses cover, the claimant effectively has less than a third of their normal income to live off once they have paid for ongoing business costs. You can imagine how challenging that might be.
Business expenses cover is an essential, easy to add, partner for income protection cover
For clients with fixed business expenses, it’s hard to mount an argument against business expenses cover. It’s an easy add on at time of application, and just like income protection, premiums are 100 per cent tax deductible.
In light of the APRA changes, ensuring your client’s protection works as hard as possible will obviously become even more crucial, which is why business expenses cover could be about to have a well-deserved moment in the sun.
Matthew Pilcher, head of proposition, PPS Mutual
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