Protecting Your Earning Capacity

In previous articles, we have written about the importance of ensuring that your biggest asset – your earnings capacity is protected.

 

A question we often get however is how do I know if what I have is ok?

 

There are many Income Protection policies on offer with many options but one of the biggest differences you need to understand what happens in the event of a claim with an Agreed Value Policy compared with an Indemnity Policy. The wrong option can have catastrophic consequences to your financial position when you need the cover the most.

 

In order to make the right choice, you must first understand the differences between these two options.

 

An Agreed Value Policy is signed off at the start, i.e. what level of income they’re willing to cover. It provides you with certainty at the time of insurance application, the amount that you have been insured for will be paid, if you need it.

 

Whereas with an Indemnity Policy, the benefit amount is estimated at the start but not financially assessed until the time of claim.

 

In both instances, you generally are able to insure up to 75% of your income, but the difference in the event of claim can be significant.

 

So which one is advantageous for you?

 

Indemnity Value Policies are usually cheaper when compared to Agreed Value. However, there is no certainty on the monthly benefits received upon the claim. Although Agreed Value income protection might be a little more expensive, it holds more value as it provides you with certainty on the benefit amount you will receive.

 

Indemnity value covers are suitable for people with a steady income over the years. However, it is quite common for things to change which may lead to the decline (sometimes only short term) of your income.

 

Possible reasons for a decline in income (which would impact on an indemnity claim but not an agreed value claim):

 

– You may be in a stable employment now but have you ever dreamt about starting your own business? Clearly, the goal would be to return to a similar or high income but this move can often lead to a short-term income drop and provide an exposure.

– You may wish to change your career entirely. This could involve further study and again a reduced income for a period of time.

– Your current industry or expertise may be subject to disruption which could affect your earning capacity or require further study.

– You may wish to reduce your working hours or start a family.

– You may have your hand forced and need to give up your career or dramatically alter your hours if a family member becomes very ill.

 

Unfortunately, one of the most tragic situations we have seen was with a middle-aged man who overtime had his work hours, job performance and income gradually get affected as a result of a debilitating mental health illness. The illness caused him to have to reduce his hours and responsibility and even take periods of unpaid leave. Rather than going on a claim in the initial stages, he struggled through perhaps in denial. The gradual decline in health eventually resulted in a claim; however, the claim was reduced as his pre-disablement income was actually lower than what it was when he took the policy out. Had he taken out an Agreed Value Policy, he would have been entitled to a higher level of income which would have provided much more financial support to him and his family and would have allowed him to focus on his recovery.

 

For anyone who has default Income Protection cover through work or a Superannuation provider, it is critical to understand these differences as often default insurance is on an Indemnity Policy basis.

 

It is also important to understand that the older we get the more “uninsurable we become” so locking in a good policy now while you are young and healthy can make a significant difference when you need the policy the most.

 

At JBS we help people assess their need for cover every day. We provide clients with piece of mind which allows them to get on with their lives in comfort knowing that they are covered. Please contact us so that we can provide you with the same level of comfort.