Following a review of the life insurance industry last year, APRA have recommended that life insurers cease offering Agreed Value income protection contracts by April 2020.

What is Agreed Value?

Agreed Value is a guaranteed benefit on an income protection policy. In order to apply for an Agreed Value benefit, the life insured provides financial evidence such as tax returns and the insurer uses this financial evidence to guarantee a defined benefit amount on the income protection policy.

As the benefit amount is guaranteed, the premium is higher than a non-guaranteed benefit (Indemnity Value). The major benefit of a guaranteed benefit is that it provides greater certainty in the event of a claim as the amount the insurer pays will be unaffected by any changes to your income in the years leading up to a claim.

Who could be affected by this change?

Anyone whose income could fluctuate significantly in the future, e.g. people who are self-employed, could potentially be negatively affected by this change. It’s also a factor for anyone who is:

  • planning extended maternity leave or a reduction in work hours for a baby
  • earning a variable income due to commissions or bonuses
  • affected later by a career or role change that reduces their income

Without a guaranteed benefit, the above group could be paid a reduced benefit by the insurer if their income had reduced in the 2 or 3 years prior to an illness or injury impacting on their ability to work. Should this occur, they would not be receiving the full benefit of the cover they are paying for.

Current policy holders are fully protected.

Existing Agreed Value policies are fully protected. That’s because these changes will only apply to new income protection policies commencing from the 1st April. Most insurers have also confirmed that policyholders will be able to increase the cover on their existing Agreed Value policies even after these changes have been implemented.

Elston’s risk management team can tailor a solution for you.

Do you feel that Agreed Value Income Protection could be beneficial for you, but you’d like to know more? Contact you Elston adviser immediately for assistance on 1300 ELSTON. Given the limited timeframe available, should an Agreed Value contract be appropriate for you, it is important that you allow enough time for advice to be prepared before implementing any recommendations on your behalf.