Income Protection Insurance Worthy of Consideration
Income protection insurance has sometimes generated disputes between insurer and insured, but it can be a wise investment despite that history. It is especially worth mentioning as the tax year draws to a close, since premium payments can be tax deductions when they are made by the end of June.
According to the “2010-2011 Annual Review” published by Australia’s Financial Ombudsman Service (FOS), life insurance disputes accounted for 905 of the cases handled by FOS during that period, a 41% increase over the previous year. This included a “particularly large jump” in the number of disputes about income protection insurance, which increased from 220 to 339.
FOS divides life insurance disputes into two categories, “income stream risk” and “non-income stream risk,” and, of 433 disputes in the former category, 78% related to income protection insurance.
Income protection insurance is designed to replace all or part of the insured’s income should injury or illness prevent the insured from working. Within that simple premise, however, coverage and policy terms can differ enormously.
One fundamental distinction relates to the way in which benefit amounts are calculated. In an indemnity policy, the benefit amount depends on the insured’s income prior to filing a claim, a formula that can be appropriate for employees with regular income that is easy to prove. The self-employed, whose incomes tend to be more variable and harder to document, may be better served by a policy written for an agreed value. There, the benefit amount is established when the policy is purchased.
Alison Maynard, Ombudsman - Investments, Life Insurance and Superannuation for FOS, reported in one interview that the insurer’s denial of an insured’s claim was behind more than half of all income protection disputes heard by FOS. She added that there are three grounds on which the decision to deny a claim most commonly rest: reliance on a medical condition that does not fall within policy terms; failure to adequately prove the insured’s level of income; and the insured’s failure to alert the insurer to a medical condition that existed when the policy was purchased.
Consumers shopping for income protection insurance should be aware of significant differences among policies. Those differences include the length of the benefit period, the level of benefits, the waiting period before benefits are paid and, perhaps most important, the definition of the type of impairment that results in payment under the policy.
While the premium for a policy purchased outside superannuation can be deducted, including the full payment for the year’s premiums when paid by 30 June, policies are generally cheaper when purchased within super.