Income Protection – how much is enough?

Q. I have an Income Protection policy with a Lifetime Benefit that I have had policy for over 10 years. I have just received my renewal notice and my insurance premium has increased by over 20%. What options do I have to reduce the costs? I am 42.

A. Income protection pays out a regular monthly benefit of up to 75% of your income for the period of time you are unable to work as a result of sickness and accident. Your policy will have a waiting period which is the time you are off work before a claim is accepted. Your policy has a benefit period which in your case is for your lifetime.

Lifetime benefit policies were offered in the Australian market in the 90s and early 2000s. Prior to this time, the benefit period on policies was limited to age 65. As competition between insurance providers escalated, companies offered greater benefits whilst aggressively competing on price. In the early 2000’s, Insurance companies ceased offering a lifetime benefit. This was in recognition that a claim for the rest of an insured’s life could be a very large open ended claim and unsustainable in terms of funding risk. The claims experience in the industry in the last 10 years has also meant that premium rates have been too low and as such across the board all premium rates have increased on or around the rate you have experienced.

Your policy is a non-cancelable policy. This means that the Insurance company cannot cancel the policy. You can cancel the policy and I suspect the Insurance company would dearly love you to do so!

You need to determine how valuable an open ended claim benefit is to you. If you have accumulated assets that you could reasonably rely on to provide for income in retirement, then a benefit ceasing at age 65 or earlier may be sufficient. Remember, this policy will pay out the agreed value of your monthly benefit which would have been 75% of your salary at the time of application, indexed to inflation thereafter. You will need to determine whether the current monthly benefit you have, will provide for living expenses and also fund some form of retirement savings. Remember, benefits received are also taxable as income.

There are 4 ways you can reduce the premiums you are being charged; reduce the benefit period from Lifetime to a shorter benefit period. Increase the waiting period from 30 days to 90 days or longer. This may be in recognition of accrued sick, holiday or long service leave. Reduce the monthly benefit if you can afford to live on a lesser monthly income amount in the event of claim. Finally you can change the policy from an agreed value contract, to an indemnity contract where you provide proof of income at the time of claim.

Carefully assess the savings you derive by pursuing any of these options as it may be a false economy. You will be able to shop around to other providers but your application will require new underwriting. Note also that no insurer will offer Lifetime benefit terms so you will be limited to a benefit to 65 at best. Make sure you are comparing like policies and be aware of the consequences of any reduction or loss of benefits.