Fidelity Income Protection

Changes to the wording make it easier to issue policies, but advisers should be careful about proof of income.

Thursday, March 29th 2012, 9:14AM 7 Comments

by Graeme Lindsay

There is a trap for advisers in the definition of Monthly Benefit in Fidelity’s Indemnity Income Protection contract.

The problem arises where the cover is issued without financial evidence based on the applicant’s declaration of income. Fidelity will issue up to $120k per annum without evidence. So, if the applicant claims to be earning $100k, Fidelity will issue $75k, or $6,250 per month. At claim time, client is required to “substantiate the monthly benefit”, and Fidelity will only pay 75% of proven income at issue. So, if the client cannot substantiate what his/her declared income was at the time of commencement, the claim will be reduced and the client’s expectation will not be met.

Fidelity is doing nothing wrong – they’re trying to make it easier to issue a policy. The problem will arise if the applicant mis-states his/her income and Fidelity issues, based on the income declared in the application, but reduces the benefit at claim time.

Accordingly, so as to avoid being on the wrong end of a Professional Indemnity claim, we strongly recommend that advisers ask applicants to prove income at issue even though Fidelity don’t require proof.

Graeme Lindsay runs Strategy Financial which provides research to advisers on insurance products. The comments in "Strategy Thoughts" outlines his view on recent product and policy changes.

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Comments from our readers

On 20 April 2012 at 5:26 pm Interested observer said:

At claim time Fidelity will pay the $6250 if at some point prior to the claim the client has confirmed that this was the level of income at the time of application. This benefit is payable for six months (less wait period) without reference to the client's immediate pre-disability income. Evidence of pre-disability income is only required after 6 months on claim.

On 18 May 2012 at 12:48 pm SMW said:

How often do we see policies written where the income is/was overstated - heaps! It would be good if all income based policies had financial underwiting to ensure that this stops being an issue at claim time and therefore people are paid what they are expecting to receive or have been paying premiums for. If some advisers and bank staff are not prepared to make the effort to get things right then maybe they should stop selling these products. To be honest, I will only recommend Agreed Value where it is possible to get it as it does offer more certainty at claim time.

On 22 May 2012 at 1:32 pm billy the broker said:

Sorry to say Graeme, but don't all indemnity contracts want proof of income at point of claim?? Or have I missed something?

On 25 May 2012 at 10:04 am steve g said:

billy the broker has hit the nail fair square on the head.

On 29 May 2012 at 12:40 am billy the broker said:

Just a couple of points with this scare mongering article.
1. Is there a price difference in premium with indemnity as opposed to agreed value? You may find there is with most IP contracts out there, and maybe some clients will not be prepared to pay the higher costs to have their sum assured secure at point of claim.
2. This really is a bit of a no-brainer actually..but in this world of compliance now, if you show due care and diligence(as a RFA) and sign it of at point of sale, that client says when they purchased said product they are fully aware that the benefit will be fully underwritten at point of claim on what they are earning at the time, there is no reason for the broker to be worried about a so called PI claim against them for poor advice. Because you have it in writing signed by the client, like I said a no brainer.
And why oh why does it always seem to come back to the broker, when there is an issue regarding this. Clients do sometimes get selective memory loss at claim time when they don't get their way and they know they are the ones that have cocked up by over inflating their income. Sign it of is what I say irrelevant of agreed or indemnity.

On 29 May 2012 at 12:25 pm Clarity said:

@billy the broker - generally you get paid the lesser of the sum insured or 75% of pre-disability income. So in Graeme's example, if you were insured for 75% of $100k, then you would be paid the lesser of 75% of the pre-disability income or the sum insured, and generally, you prove the loss of income immediately prior to the claim event.

From what I can see, Fidelity are saying that at time of claim you must firstly prove that at the time of application your income was in fact $100k. If it were less, then they recalculate the sum insured, and use this as the basis of determining the loss. So, if you stated the income as $100k, and it was only $90k, then Fidelity seem to go back and recalculate the initial sum insured as 74% of $90k. Let’s assume that since application, the salary is now $100k. From what I see, Fidelity would pay 75% of $90k, not $100k (I assume they will refund the difference in premium charged).

I think Graeme is trying to illustrate that Fidelity operate differently to the way other companies manage income protection, and is trying to bring that to our attention.
@interested observer – It would be nice to get Fidelity to confirm your comments regarding “if at some point prior to the claim the client has confirmed that this was the level of income at the time of application.”

According to the policy wording (which is the binding contract), “No benefit is payable unless the income established at application time is substantiated or pre-disability income is provided at claim time.”

On 6 June 2012 at 4:09 pm Sarah said:

This seems to be a rather fruitless endeavour. The end-to-end process is essentially the same however in reverse order. If anything, Fidelity may be creating work for themselves just to speed up the process of putting business on the books. Any idea what happens to the overpaid premium (for a higher sum insured than the client's eligible for)?

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