Agreed value income protection (RIP)
It is no longer possible to take out agreed value income protection – an insurer now typically bases a payout on what you earned in the 12 months prior to your claim.
Key takeaways
- Agreed value income protection is no longer available in Australia.
- APRA intervened to address some pretty hectic risks it was leading to.
- There are some other options that can help.
Income protection insurance has long been a valuable safety net for Australians, providing financial support in the event of illness or injury. One type of income protection, agreed value, was particularly popular for its guaranteed benefit amount. However, due to industry changes and regulatory interventions, agreed value income protection is no longer available for new policies.
Understanding Agreed Value
With agreed value income protection, policyholders locked in a specific benefit amount when they first purchased the policy. This meant that regardless of any income fluctuations after the initial purchase, the benefit remained fixed. This was particularly attractive to those with variable incomes, such as self-employed individuals or those with commission-based roles.
Regulatory Intervention
In 2020, the Australian Prudential Regulation Authority (APRA) intervened in the life insurance market due to concerns about the sustainability of individual disability income insurance (IDII) policies. APRA identified several issues with agreed value policies, including:
- Moral Hazard: The potential for policyholders to have less motivation to return to work due to the guaranteed benefit.
- Unsustainable Costs: The risk of insurers incurring significant losses if policyholders' incomes declined after purchasing the policy.
- Deviation from the Principle of Indemnity: Agreed value policies could violate the principle of indemnity, where benefits should not exceed economic loss.
APRA's Mandated Changes
To address these concerns, APRA required insurance companies to:
- Cease Offering Agreed Value Policies: New policies must be issued on an indemnity basis.
- Base Cover on Income at Time of Claim: Benefit amounts should be linked to income within the 12 months prior to making a claim.
- Limit Income Replacement Ratios: Benefits should be capped at a certain percentage of earnings.
- Restrict Guaranteed Renewability: Policies should have a shorter guaranteed renewal period.
Impact on Policyholders
The transition from agreed value to indemnity value has significant implications for policyholders. Those with existing agreed value policies have been able to maintain their coverage, but new buyers are limited to indemnity value options.
Key Considerations
When comparing income protection policies, it's essential to evaluate the following factors:
- Benefit Amount: Determine the level of coverage you need to adequately support your lifestyle and financial obligations.
- Waiting Period: Consider the length of time you're willing to wait before benefits begin.
- Benefit Period: Evaluate how long you want the benefits to continue.
- Exclusions and Limitations: Understand any conditions that might affect your eligibility for benefits.
- Premium Costs: Compare premiums from different insurers to find the best value for your needs.
Comparing Income Protection Policies
To find the right income protection policy for you, use our comparison tool to compare quotes from leading insurers. You can also consult with a financial advisor for personalized guidance.
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