Has your income protection insurance left you under-insured? Are you paying your premiums in the most tax-effective way? Is your policy providing you the best value for money? Teresa Russell reports on the latest trends in income protection insurance for lawyers
So, what would happen if you couldn't work? "I'd lie on a beach in Tahiti" is not one of the multiple-choice answers available to you. You may not be able to work because you are in rehabilitation, learning to talk again following a stroke, or perhaps you are learning to manage your colostomy bag after bowel cancer surgery. When did you last revisit the details of your income protection insurance cover? Insurance companies revise their products every 12 months and so should the holders of income protection insurance policies. Should the fact that you are time-poor stop you protecting your biggest asset - your future income?
A 2008 joint report between the Australian Institute of Superannuation Trustees (AIST) and Industry Funds Forum (IFF) showed that 45 per cent of people who hold income protection insurance are underinsured by $1000 or more per month, while 12 per cent are over-insured by at least $1000 per month.
It says that men, higher-income earners and families with dependent children are more likely to get their insurance cover right than women and low-income earners. This statistic is also reflected in the finding that 40 per cent of males and 52 per cent of females find buying personal insurance overwhelming.
Lawyers Weekly spoke to four industry experts about recent innovations in the income protection insurance market. When asked what advice they would give a lawyer who was going to review his/her income protection insurance, they all said first - and without hesitation - consult with an independent financial adviser.
Sean McCormack, head of products at MLC insurance, recalls a conversation he once had with a financial adviser: "He said that 'everyone makes mistakes with their financial affairs, but the high-income earners have zeros at the end of theirs.'"
Many people take out their initial cover when they either take on a sizeable debt or have a family. Scott Moffit, senior technical manager of life insurance for BT Financial Group, says that although an amount of cover may initially be correct, salary increases greater than CPI can quickly turn this into inadequate cover. An annual review of your policy would mitigate this risk.
Marc Fabris, strategic marketing manager, life risk, at Zurich Financial Services Australia, says that the biggest risk when taking out a policy is that the individual has made a full and accurate disclosure. "You must disclose anything that you know, or ought to know, that could impact the insurer's decision to insure you. Applicants should have the same amount of information as their insurers," he says.
All types of people, from electricians to neurosurgeons, take out income protection insurance. Justin Delaney, head of Macquarie Life, says that many claims that are paid out today are for lifestyle-related illnesses, brought on by a lack of exercise, too much stress, smoking or alcohol. Fabris says that many insurance companies would now be paying up to 20 per cent of their claims for permanent disablement as a result of mental illness. Lawyers, as a group, often fall into these categories.
New product innovations
In 2005, Rice Warner Actuaries, a company that does significant research in the finance industry, criticised the lack of innovation in income protection insurance products. "In the last 20 years, the only new product that has been developed is trauma cover (introduced initially as dread disease or critical illness insurance) ... it cannot be included in superannuation funds and has only been marketed via intermediaries," it said in Asset magazine.
"It has been made excessively complicated with many relatively rare diseases and conditions included when a simple product covering the major ailments (cancer, heart attack, stroke, renal failure) could be designed easily and sold differently."
Things have changed since then. Zurich's Fabris says that most companies offer a standard product and a "plus" product. Product differentiation has occurred in many areas (see box) but there is no publicly available comparison of all the income protection policies on the market. "Be aware of the comparison tools that financial advisers use to compare and assess the appropriate policy," cautions Fabris.
The basic purpose of income protection is to provide up to 75 per cent replacement income if a person loses the ability to earn an income because of injury or illness. However, recent product innovations have seen the maximum monthly payment amount change from $20,000 to $30,000 and, in Macquarie Life's case, to $60,000 per month.
One of the biggest recent innovations across the market has been the creation of policies with benefits paid till the age of 65, not just for the traditional one or two years.
Some policies stay the same once they have been issued, while others are automatically updated with all the new product offerings added to older policies at no extra charge. "If benefits are frozen and upgrades are not available, customers often have to cancel one policy and then take out another," says MLC's McCormack.
"You must choose your policy carefully, because you may not be accepted when you reapply." MLC's policyholders all receive annual upgrades.
All insurers have been working to simplify the access to their products for both the policyholder and financial planners. "It's a significant process to get some people insured," says Delaney. "Using innovative technology, Macquarie can now issue a policy just 15 minutes after the adviser has completed the application."
Another innovation is business overhead insurance, which is paid on the basis of sickness or accident. "This is particularly applicable to lawyers, because if a lawyer can't work, the benefit covers the cost of overheads, including the net cost of a locum," says BT's Moffit, who adds that business expense cover is an even more under-insured market than income protection.
Income protection premiums are, of course, a business expense, and therefore, tax deductible. However, not everyone understands that premiums can be paid by their superannuation fund. Many super funds provide a basic income protection insurance product, but each insurance company Lawyers Weekly spoke to has created "connected benefit" insurance policies that allows customers to have some parts of their policy funded by their super (and paid at a concessional rate), while other parts, such as trauma insurance and a lot of the "bells and whistles" are outside of superannuation.
The other issue that effects an applicant's taxation position is whether he/she chooses to take any payout as a pension or a lump sum. "There are other tax benefits at the margins, so it is important to see a financial adviser," says McCormack.
Financial advisers may be independent operators, salaried employees of insurance companies or self-employed licensees of insurance companies. They are required by law to declare their affiliations to their clients.