When should advisers include a proof of income endorsement for a client's income protection policy?
One continuing area of uncertainty surrounds proof of income endorsements.
During my time as a compliance auditor there did not appear to be a great understanding of this particular endorsement among risk specialist advisers or financial planners.
With every income protection (IP) client I attended to where they were eligible for an ‘agreed value’ worded IP policy, I would explain the convenience of ‘proof of income’ endorsements delivered at claim time. Some advisers I have spoken with were of the view that with an agreed value income protection policy, where they had provided satisfactory proof of income at the underwriting stage, there would be no need to do so at claim time.
Speaking to different life office underwriters confirmed what I knew to be the case. (Note that I spoke with underwriters at three major risk insurance product providers, thus what I am saying below only applies to these three. In every instance, an adviser should ascertain what does and doesn’t apply with the given life office they are actually recommending to their client.)
With the three underwriters I spoke to, they confirmed a proof of income endorsement would only be added to a policy if the adviser specifically requests it. This is necessary since agreed value policies can still be issued without the actual submission of proof of income at the underwriting stage. To me, it sort of defeats the whole purpose of having the term 'agreed value' if proof of income still has to be supplied at claim time.
One very important point about proof of income endorsements is the fact that they only apply during a period of ‘total disability’ and they cease to apply when the client’s claim changes to ‘partial disability’. To calculate a ‘partial disability’ benefit, a case manager needs income details to determine how much they can pay on top of what the client is now actively earning. Even where there is an added definition that provides for full payment of the monthly benefit. For example, if earnings are less than 25 per cent of the pre-disability income, the case manager will still need to see evidence of how much the client is earning to ensure they can continue to pay the full total disability benefit.
The other area where proof of income endorsements can cause confusion at claim time is with linked super/outside ownership.
Where an income protection policy is linked, the Temporary Incapacity definition under the SIS Act is the only basis upon which a case manager can assess a claim under super ownership. If they cannot satisfy this definition, they are then able to defer to the ordinary part of the policy. That is the linked part outside of super.
Proof of income endorsements only apply to the ordinary ownership side of IP cover. Where satisfactory proof of income was provided at time of underwriting, and a proof of income endorsement was attached, it will still be necessary for the case manager to seek proof of income for the immediate 12-month period prior to the date of commencement of the claim. This is necessary to satisfy the Temporary Incapacity definition under the SIS Act.
So, is it still worth requesting a proof of income endorsement with a linked income protection arrangement?
My answer is yes.
If the claimant is able to satisfy the Temporary Incapacity definition and the result is payment of the full monthly benefit, then no problems. However, if the case manager cannot approve payment of the entire monthly benefit (due to the immediate past 12 months of reported income not supporting same) or any benefit at all, the case manager should then be able to defer to the Ordinary side of the linked cover and pay the full monthly benefit without any further need to seek additional proof of income. Note that keeping in mind this applies whilst the claimant is totally disabled.
With some 50 per cent of all new income protection policies now being issued under super ownership, we need to be very clear on what is exactly covered and when or if it is indeed covered.
Phil Smith is a director of Dawes Smith & Partners
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