Taking out an income protection policy? Check the fine print, says Christine Long.

Buyer beware: income protection policies have been undergoing some major reconstruction work in recent years. Driven by unexpected claims experience, many insurers have been raising premiums and reining in benefits on these policies, designed to provide people with a monthly income (typically about 75 per cent of salary) if they are unable to work because of illness or injury.

Mark Kachor, the managing director at DEXX&R, says premiums for some professionals have risen by about 25 per cent in the past five years.

Some insurers are still raising premiums, but, Kachor says, the industry’s increases have reached a plateau in the past 12 months.

However, he adds, the benefits offered by insurers have also been under scrutiny.

"The benefits provided by policies have been revised, with most now offering a tighter definition of pre-disability income, and benefits such as lifetime accident have been removed."

Sean Carroll, the general manager of life insurance at Asteron, says consumers probably haven’t seen the last of the changes.

He considers the industry probably has some adjustments still to come, either through direct price increases or limitations of benefits.

Nevertheless, with debt levels rising in Australia and with premiums tax-deductible, there is still a strong incentive for taking out income protection insurance. If you are in the market for a new or alternative policy, it is important to understand how these trends are affecting the market.

As the table shows, annual income protection premiums can vary quite widely between companies. A 30-year-old male nonsmoking accountant taking out a policy with a monthly benefit of $5000 may pay a premium of anywhere from $366 to $1021 a year, for instance.

Premiums are also influenced by a range of other factors, including the policyholder’s age, gender, occupation and smoking habits.

Premiums for women tend to be 30 to 70 per cent higher than those paid by men, while smokers pay 25 to 30 per cent more than non-smokers, says Kachor.

But in recent times one of the main drivers of premium growth has been related to the industry’s experience with different occupations.

In the past blue collar workers were considered a greater risk than white collar workers because of the chance of injury through manual work. However, experience has shown that some white collar workers, such as doctors and lawyers, are more prone to expensive and long-term stressrelated claims.

As a result the industry is moving towards treating these professionals as a separate category in assessing the risk of a policyholder.

Helen Troup, the head of risk at ING, says: "What we’re finding is the industry as a whole has become better educated about our markets and market segments. Lots of companies have changed from having four occupation classes to seven, and one is coming out with 10."

Because of this, she says, it is likely the premium a doctor would pay today would be substantially higher than if the policy were purchased three or four years ago.

Terry Brain, a director of Risk and Business Consultants, says reinsurers are also making it harder for people to take out cover for monthly benefits of more than $20,000.

"Reinsurers seem to have taken an attitude that income protection should be for the needy rather than the greedy," he says.

Troup says ING has previously offered a premium discount to policyholders taking out cover for significant monthly benefits.

However, it has been reducing these discounts because it has found they have also tended to stay on claim for longer periods.

Insurers are also trying to limit their exposure to long-term claims, such as those related to mental disorders and back injuries.

For instance, Lumley Insurance’s Optimal policy limits benefits to a maximum of two years, unless the disability is caused by one of a specific set of medical problems or injuries.

MLC’s Standard policy excludes cover for disabilities arising from chronic fatigue and mental disorders and/or talcohol, drug and chemical dependency unless under supervision, while ING offers policyholders a discount of between 5 and 15 per cent if they agree to limit benefits for mental disorder claims to 12 months.

Most insurers are also asking for more details about any previous back injuries or mental disorders upfront.

It’s a combination of developments that means existing policyholders should think very carefully before switching insurers (see "Should I Stay or Go").

"What’s now important is to see how the policy you buy today compares with what you have in force," says Kachor.

Should I stay or should go?

Stephen Moore, the general manager of platform development at MLC Wealth Protection, says policyholders should always make sure their new insurance is in place before cancelling their existing cover.

This is particularly so if the health of the policyholder has deteriorated or they have made a claim since taking out their existing policy. In that situation the new insurer may impose a loading on the standard premium or exclude any pre-existing conditions.

If your standard of health is similar, switching may be a lot easier. Some insurers will offer "takeover terms" which may only require a "short-form" health declaration if you meet certain conditions, says Terry Brain.

Also be aware the benefits and definitions applied by insurers can vary significantly.

Check whether your existing policy is agreed value or indemnity. An agreed value policy will pay the agreed monthly benefit no matter what your income before going on claim was.

However, indemnity contracts have become more widespread in recent years. This is where the payout will be the lower of the insured monthly benefit or 75 per cent of your income 12 months before becoming disabled.

If you are self-employed or have a fluctuating income, you may find an indemnity-style contract leaves you short.

But if you have a stable income, taking an indemnity policy may help reduce your premium by as much as 20 per cent.

Companies also apply different definitions of when you will be considered disabled. At MLC it is when you cannot do one of the important duties of your occupation, while ING applies a definition of one or more important duties and Asteron will pay out if you cannot perform the important duties of your occupation more than 10 hours a week.

It may also be based on when you cannot earn 80 per cent of your income.

These definitions may also change over time. Under MLC’s standard policy the definition changes to important duties of any occupation you are suited to by way of education, training or experience after a policyholder has been claiming for two years.

An alternative strategy may be to look for ways to reduce your premium with your existing insurer. Increasing the waiting period on your policy from the standard 30 days to 60 or 90 days can produce a significant reduction in premium. If your employer provides group salary continuance cover, you may be able to extend the waiting period on an individual policy to two years.

Also review any optional benefits. Paying to have benefits indexed by CPI can add 10 to 15 per cent to the premium, says Mark Kachor of DEXX&R.

If you are about to buy a policy, you could save some money by asking your adviser to accept a reduced commission, he says.

"Most companies offer a premium discount if the adviser is prepared to reduce the commission," says Kachor.

Questions to ask

What offsets will be applied to: workers compensation, sick leave and total and permanent disability cover?

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