Financial – Indemnity & Agreed Value Income Protection Policies – The Importance of Getting It Right

Ryan Katzen is a degree qualified accountant who started his professional career working in public practice accounting for over five years before moving into the field of life insurance. Starting at AIA as the team’s financial specialist, Ryan has gained exposure to all facets of claims management and assessment over the last few years and was promoted to be a Team Leader 4 years ago and appointed to the role of AIA’s National Retail Claims Manager in January 2017. With a strong technical background, passion, enthusiasm and willingness to initiate change, Ryan is always open to feedback and suggestions on how we can make a difference.

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Indemnity & Agreed value Income Protection policies – The importance of getting it right.

Welcome to 2017:

  • Donald Trump has been elected as the 45th President of the United States;
  • Our oldest living former Prime Minister, the Honourable Bob Hawke, sculled a beer before lunchtime on live TV;
  • We live in a society where 40.5% of adults ‘Always or often’ feel as though they are rushed or pressed for time and (1);
  • A typical middle-income Australia family with two children only have $258,000.00 or 38% of the $680,000.00 of cover they actually need (2)

While the first two points are there for a laugh, the last two, the points about our population being time poor and underinsured, lead us to a perfect life insurance storm just like the tale I will tell you about next – Let me set the scene first though …

Income protection policies generally come in two forms; an indemnity basis or an agreed value basis.

Over the years, I’ve found the easiest analogy to use to explain the difference between the two is to describe it as if it were car insurance.  Let’s make this more tangible and use a year 2012 VW Polo for our example.

Indemnity based income protection cover in life insurance works similar to a ‘market’ rate for car insurance.  We start with a sum insured now and if something were to happen, we take a look at the cars market value at the time of the event and the benefit payable would be based on that.  In life insurance this means that we choose a sum insured at time of application that, in most cases, represents around 75-85% of someone’s regular income and nothing further needs to be provided to an insurer unless you’re needing to lodge a claim.  An indemnity based product works great for a regular employee / salary and wage earner with a steady income with little fluctuation aside from, hopefully, wink wink, a slight pay rise each year.

Back to my polo though, let’s say its market rate is $10,000.00 at current.  I may disagree and feel that it’s valued too low because I know that:

Car Insurance Income Protection Similarities
Always garaged & low kilometres A sedentary occupation
Full dealership service history PMAR / medical history supplied at application
It never skips a beat No previous medical issues to disclose

In this case I may say I believe my car to be worth more, say $15,000.00.  If this is the case, I’d elect to choose an agreed value policy with the insurer at the time of application.

The main difference with an agreed value benefit is that, as the name suggests, it is agreed upon at the time I take my policy out.

Similar to car insurance, agreed value cover generally attracts a slightly higher cost but it provides the peace of mind that if anything were to happen to my pride and joy (if it were stolen or written off for example) I’d be paid my agreed value of benefit totalling to $15,000.00.

On to life insurance; to ‘agree’ on an amount with the insurer, the relevant financial information is provided at the time of application and this is ‘agreed’ upon by the underwriter and insurance company at application stage.

Acting in good faith however, we recognise that self-employed individuals have additional time to lodge their financials and tax returns to the ATO at a later date than regular employees & individuals (4).  In a lot of cases, it actually makes sense from both a financial and cash flow perspective to lodge your financials & returns at a later date.  In these circumstances, an insurer will allow what we deem to be an agreed value (unverified) policy – An income protection a policy that needs to be verified at a later date.

On most occasions, this is a non-issue but there are occasions that this offering can be problematic.

Working in a claims team, I can assure you that no one calls our department for a chit chat or to discuss the weather for example.  We are here to assist someone at their time of need and we receive calls usually after something terrible has occurred and our clients are in a strained state.  Like any insurer, it’s in our philosophy and our DNA to assist and make a difference by providing both financial and rehabilitative support wherever possible.  To assist though, we require certain information.  Usually this is in the form of both claim forms and some medical certification.

In the case of an agreed value (unverified) policy though, this can also mean needing to source and provide some older financials and tax returns.  As an example, if I’ve applied for my IP cover in September 2016 but didn’t have my financials completed at this stage, on top of claim forms and medical information, I may be required to provide one or two years’ worth of financials to verify my agreed value benefit.  Now I like to think that I’m fairly organised but, truth be told, I couldn’t tell you what I was eating two days ago let alone where my tax returns from 2 years ago are.

Also, what happens if I’ve applied for a monthly benefit of $5,000.00 per month but my 2016 financials, once completed by my accountant, are only able to support $2,000.00 per month because I had some changes in my business that year?  What if I was banking on some customers to repay me for good or services and it never came? What if $50,000.00 of income from one of my biggest customers needed to be recorded as a bad debt & written off drastically changing the income I projected for the year?

You can only imagine the frustration and further pressure that this could cause to a small business owner on its own let alone someone who’s had something terrible happen preventing them from working.  This loss of income could also have a detrimental effect on the sum insured they had as their piece of mind.

The above highlights the importance of having the right amount of cover and regularly checking to see if the cover you have is still relevant and enough to assist at your time of need.  Preventing this is quite simple – once the required financials are available they just need to be reviewed and verified by the underwriter so that the sum insured can become truly ‘agreed’.  This alternative is much easier for clients to take care of while they’re ok instead of added stress if they’re busy trying to lodge a claim.

Insurers truly do look to do the right thing for clients wherever possible and being able to call a client with the good news that their claim has been accepted and that their benefit has been paid is the reason I work in this industry.  The ability to assist and make a difference is what brings satisfaction to claims staff so it’s important that we as an industry try our best to ensure the above does not occur where possible.


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