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Agreed Value Income Protection

Mitch Ramsbotham

Financial Expert Updated on July 14, 2022

i Disclosure statement

An Agreed Value Income Protection Policy is ideal for individuals who want maximum financial protection but have a fluctuating income stream.

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Income protection insurance is a type of insurance that essentially goes to work when you are unable to. Income protection insurance provides a regular, monthly benefit when you are incapacitated due to illness or injury and are unable to work.

There are two different kinds of income protection insurance :

  1. Agreed Value
  2. Indemnity Value

Previously, choosing between agreed value and indemnity income protection was possible, with both policy types having pros and cons.

However, agreed value income protection products are now a thing of the past and are no longer available for new insurance purchasers, with significant changes to these policies placed by the regulator, the Australian Prudential Regulation Authority (APRA), on 2 December 2019.

Although Australians can no longer purchase these policies in Australia, if you still hold a policy (as of 1 April 2020), it can still be maintained and altered in the future.

If you hold an agreed value income protection policy, it is essential to understand the nature of these policies, particularly for current policyholders who may be considering switching away from these policies to the indemnity value income protection policies that exist today.

In this article, we look at:

  • What agreed value income protection is
  • How these policies work
  • What an agreed value income protection policy benefit payout looks like
  • What issues existed that prompted the regulator to switch away from offering these policies for purchase on the Australian market

What Is Agreed Value Income Protection?

An agreed value income protection policy is one type of income protection insurance that is designed to provide financial support in the event you are unable to work due to injury or illness.

With an agreed value income protection policy, you receive monthly payments if you can’t work and these payments are based on a percentage of your income when you applied for the insurance (up to 85%).

Therefore, if your annual income when you took out this insurance policy was $150,000, and your income now is only $80,000, your monthly benefit will still be based on the already agreed upon $150,000.

How Does Agreed Value Insurance Work?

An agreed value insurance cover works as income protection that pays a certain percentage of your pre-tax income when you cannot work.

With an agreed value policy, you are required to verify your income when applying for the income protection. Your income is agreed to at the start of your policy.

This means you will know what you will receive regardless of your income at the time of claim. Generally clients who are self-employed or are concerned about income fluctuation (e.g. maternity leave) would favour an agreed contract. This option is not as cost effective as an indemnity style policy but it provides you with more certainty of your benefit amount if you need to make a claim.

Understandably, agreed value covers were popular for those with fluctuating incomes. However, recent changes made by APRA has seen agreed value income protection insurance policies removed from the Australian market. 

Buying Agreed Value Income Protection Insurance

Purchasing an agreed value income protection insurance policy is no longer possible in Australia with changes made by the industry regulator APRA, which saw these policies outdated as of 1 April 2020. 

However, if you already hold a policy (as of April 2020), your policy can still be active and adjusted for the future.

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Can You Have Agreed Value Life Insurance in Superannuation?

Most super funds only offer indemnity value income protection insurance.

This is because The Superannuation Act stipulates that the benefit amount to be released from your superannuation can not be greater than the amount of income you earned before being ill or injured. Therefore, the benefits of an agreed value policies were not compatible with superannuation legislation in the first place.

Income Protection Indemnity vs. Agreed Value

The primary difference between indemnity policies and agreed value income protection was the calculation of the benefit provided. 

  • Agreed value income protection policy benefits are calculated using the insured’s income at the time of purchasing the policy
  • Indemnity value policies base benefit payments on the insured’s income at the time of incapcaity/when making a claim

How Does Agreed Value Insurance Policy Look When Paid Out?

Like all income protection policies, agreed value cover pays out monthly benefits in replacement of your usual actual income.

Depending on the structure of your income protection cover and the percentage of income you have opted to take cover to for, you will receive a monthly payment.

With an agreed value policy, this amount will be based on your regular salary when you purchased the policy.

For example, if you were earning $200,000 a year when purchasing an agreed value policy, then had subsequently changed roles and at the time of injury only earning $50,000 annually, the benefit payment would still be based on the $200,000 figure.

Some insurers set the payout value at 75% of the insured’s monthly income. Using the above example, the insured who used to earn $200,000 should receive an agreed value payout of $150,000.

With an indemnity value policy, using the same example, the individual’s benefit payment will be based on their current salary, which is $50,000. Thus, with a 75% indemnity value payout, the insured will receive $37,500.

What Are the Changes and When Will They Happen?

On 2 December 2019, the insurance regulator APRA announced a change discontinuing the availability of agreed value income protection insurance policies in Australia as of 1 April 2020. Thereofre, life insurers can no longer sell these agreed value income protection policies, only indemnity value cover.  

Agreed value policies written and submitted before this date and were issued by 30 June 2020 can still be maintained by policyholders and amended in the future.

The primary reason for the change was the enormous losses that insurers suffered from these generous policies.

In the five years preceding the end of 2019, APRA indicated that insurers made a total loss of $3.4 billion, making agreed value income protection covers unsustainable for the industry.

Who Will the Changes Impact?

The changes naturally affect any Australians wishing to purchase agreed value life insurance, as it is now no longer possible to do so. The effect on current agreed value income protection policyholders is minimal, as their current policies remain intact. 

Additionally, as the restriction on agreed value income protection insurance policies was not the only change made by the regulator, Australians now face stricter eligibility and claim process requirements concerning their income protection policies and capped limits of benefit payments. 

How Do the Changes Affect the Quoting and Application Process?

The move away from agreed value income protection insurance does affect the quoting and application process for income protection insurance covers. 

In terms of obtaining quotes, customers may find that the income protection premiums are lower than expected as ingebnral, indemnity vaue policies are cheaper, with agreed value income protection policies tending to have a higher premium. 

Additionally, a life insurance company may have a more thorough quoting and application process with other changes made by APRA focusing on stricter eligibility requirements, such as asking individuals seeking insurance to provide more documentation to secure income protection insurance than they did previously. 

How Do These Changes Affect Existing Customers With Agreed Value?

Existing customers with agreed value policies will still be able to maintain their policy.

Howver, there are some other changes made by APRA which may affect your personal circumstances if you need to make a claim.

Benefits will now be capped at 90% of an insured’s earnings for an initial six-month period, followed by a 70% cap for the remaining benefit period. This change ensures that a benefit payment cannot exceed 100% of an insured’s income due to any extra payments received, such as advance payments or rehabilitation payments which may also form part of an income protection insurance policy. 

What Is the Difference Between an Endorsed Value Policy and an Agreed Value Policy?

An endorsed value policy, also known as guaranteed value, is a term some insurers use to refer to an agreed value income protection insurance policy where the financial proof at application time has been reviewed, approved and endorsed by the insurance company. This means that your policy meets the income benefit amount that you requested.

This removes any potential uncertainty around the benefit to be paid, eliminating a key step in the process, often resulting in faster administration of your claim.

Further Issues With Agreed Value Income Protection Insurance

Agreed value insurance created issues, such as discouraging ill or injured people from returning to work, due to the fact that it was possible for them to earn a higher income from the agreed value benefit payment than from their current income. They had no incentive to return to work. 

This is why APRA made the decision to discontinue this income protection policy type, for the sustainability of the life insurance industry in Australia.

What to Consider Before Purchasing Income Protection Insurance

Before purchasing any income protection insurance policy to help manage your financial situation, you must do your research.

This action includes reviewing the policy choices that can affect your policy premiums, including the policy waiting period and the policy benefit period. 

The policy waiting period is the period of time in which you will need to wait whilst off work to receive your income protection benefit payment. This period can be anywhere from a week to several months, with payments generally commencing in the month following the expiration of the waiting period.

Generally, the shorter the waiting period, the more expensive the policy. 

Similarly, the benefit period is also something to consider, with benefit periods reflecting the time the insurer pays out the benefit payment. Again, the longer the benefit period, the more expensive the policy. 

Another thing that you should always consider when purchasing any product from insurance companies is the policy’s product disclosure statement (PDS). The PDS provides vital details about the terms and conditions of your policy, such as the estimated sum insured, medical conditions covered, disability definitions, claim times, or exclusions.

A comprehensive financial services guide (FSG) and target market determinations (TMD) for each insurance product may be available.

Financial advisers may also provide life insurance calculators as a convenient way for customers to compute potential premiums and payouts.

Companies operating legally in Australia’s insurance industry should have an Australian financial services licence (AFSL) and an Australian business number (ABN).

For enquiries about income protection insurance and information relating to which policy is best suited to your individual needs, reach out to our team.

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Not sure where to start, or want help securing the right insurance faster? Let us help you find the best solution for your needs.

Talk to a Finance Expert

References

  1. Changes to Income Protection aim to improve sustainability but what are the impacts to your policy?

https://www.findex.com.au/insights/article/changes-to-income-protection-aim-to-improve-sustainability-but-what-are-the-impacts-to-your-policy

  1. Agreed Value Income Protection

https://www.mlc.com.au/content/dam/mlc/documents/pdf/advice/Income-Protection-Insurance.pdf

  1. Total and permanent disability (TPD) insurance

https://moneysmart.gov.au/how-life-insurance-works/total-and-permanent-disability-tpd-insurance

  1. Agreed Value Income Protection Insurance

https://firstfinancial.com.au/removal-of-agreed-value-income-protection-policies/

  1. Changes to Income Protection from 1 October 2021

https://www.tal.com.au/slice-of-life-blog/income-protection-changes-from-october-2021

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