What's the best income protection when incomes fluctuate?

I have heard advisers argue about income changes a lot – the question is at the heart of the debate about whether or not a client should buy agreed value income protection cover. 

Many advisers, and I guess their clients, prefer to take their chances with the ‘best 12 months out of the last three years’ definition. It is generous, and people employed full time can consult their experience and feel that it is unlikely to be a problem. But what exactly are the risks?

OECD data shows that income volatility is large and relatively common. This should affect how we see the choices we have for income protection insurance.

Income volatility is the chance of a change in income of more than 20% includes the ‘risk’ of having your income rise, but with our focus on income protection insurance our interest is in the chances of a decrease in income.