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Watch out for the newly promoted income protection client

Russell Hutchinson provides an example of why the policy wording of some income protection products should be changed.

Thursday, March 26th 2015, 10:14AM 3 Comments

by Russell Hutchinson

Imagine this: a hardworking junior manager has finally been recognised for all his or her hard work and won the big job: a step up from, say, $60,000 a year to $120,000 plus car. Wow. Good for them!

Being a good conscientious person right after getting the new job they call you up and arrange to review their insurance package. Happily you set them up with a good loss of earnings or indemnity contract.

Three months later they get bad news and are disabled, laid low with something out of the blue, and although it is covered – that’s the good news – the bad news is that they won’t be getting their full sum insured.

This was a real case, and that situation was discovered by an adviser recently, very surprised to see that the ‘best 12 continuous period of 12 months in the last three years’ would have an unfortunate impact on the claim.

That’s because only three months on the new package would be dragged back down by nine months on the old salary – meaning a definition of pre-disability income that is much lower than the actual current income.

You might grumble that the adviser should have placed them in a premium indemnity or loss of earnings contract with a ‘best of both worlds’ definition. Alternatively an Agreed Value product would have done the job.

However, I think that there is an issue with product design.

Having underwritten the client on the basis of the $120,000 plus car then I think the insurer should have a provision to ensure that is what they pay to a claimant rapidly disabled.

I don’t think the intention of the financial underwriting provision is to penalise someone like this – it is to ensure a genuine principle of indemnity is applied if the insured’s income has reduced permanently. The wording could be changed to recognise this.

In fact, the claim could be paid, but that’s not a matter to discuss in an article.

Tags: Income Protection Life insurance Loss of earnings Russell Hutchinson

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Comments from our readers

On 27 March 2015 at 11:56 am RiskAdviser said:
The design aspect cuts both ways, presently it usually works in favour of the client as they often have a drop off in income prior to claim, so a short window would disadvantage more not less. There's lots of reasons to use indemnity and loss of earnings, tax position, ancillary benefits, % to KS and spec injury amounts etc. The real reason for this cover is replace income when disabled. Agreed value, especially when financial statements and payslips are available, avoids surprises like this in a fundamental area of the contract. 90 day stand down clauses and calculations done at claim continue to cause advisers and insurers headaches, yet the use of agreed value continues to be ignored by the majority. Yes as Russell says the premium product best of both worlds might be better, but it comes at a higher cost and needs provisioning for tax. Why not put your client into a secure position with agreed value and dump using indemnity, except where you have to, as a starting point. We already do plenty of paperwork, it's not that hard to grab a couple of payslips along the way and avoid these situations for our clients. As an aside, what happens when this guy ends up self-employed, then what? He's insured but still probably can't claim.
On 8 April 2015 at 8:42 am Mark Ogden said:
While I agree if proof of income is available then agreed value type LOE would be best. The reality is even if the client has an increase of income and trusts the policy will pay any loss up to the benefit amount(or 75% of), if the client has an accident for example most insures won't pay anything even though there is a loss(a few month after said increase).
It is because they use the average of the best of 12 months, no matter what policy you are on. There is always a hole.

I don't believe the article was to debate the merits of the various products but to highlight a problem with policy wording for the employed's pre-disability definition - Just needs an addition of, a copy of latest contract or the last few payslips. If they are happy to underwrite with it they should be happy to use it at claim time, as the above mentioned we are happy to grab a couple of payslips to underwrite with, but don't expect them to use this at claim time if the client has had an increase.

The bizarre thing is after 12 months it doesn't make any difference. I also believe the policies were meant to pay in this circumstance as Russell alluded to. Lost in translation between product development, policy documentation and claims.
On 1 October 2015 at 10:09 pm Briskinsurance said:
AIA has changed the definition of predisability income in relaunch of their loss of earnings premier product yesterday. The below definition should entitle client to maximum benefit :

• Pre disability income definitions:
– Greater of - the average income during any one 12 month period during the three years prior; or monthly income earned immediately prior to the disability

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