Many insurers have been increasing premiums and reining in the benefits to try to turn around their poor claims experience.

Although they report the worst of the changes have been made, analysts suggest that consumers may not have seen the last of this.

If you are thinking of buying, switching or renewing a policy, it is important to understand what is driving these trends and how they affect the cover.

Why is income protection changing?

In the past five years the claims faced by insurers have been much higher and, more importantly, longer than they expected.

As a result, Frank Smith, deputy chief executive at Lumley Life, says most life insurers are losing money "hand over fist" on disability contracts.

He says these problems have their roots in the early 1990s when fierce competition led to "benefit creep" in the industry.

Insurers kept adding more bells and whistles to their products without looking at the longerterm sustainability of their tactics.

Most disability insurers now freely admit that the result was products that were poorly designed, too cheap and based on lax underwriting decisions.

"Fundamentally, all that can happen in the future is you can downgrade the product and somehow wind back the benefit creep," Mr Smith says.

How can you get the policy you need?

You should ask the following questions before making a decision.

What are the benefits?

Traditionally, incomeprotection policies have been "agreed value" contracts where the level of benefits was guaranteed when someone made a claim. For instance, someone earning $150,000 a year might insure themselves for a monthly benefit of $9375.

Under these contracts the benefit of $9375 would still be paid even if the income of the insured person had dropped to $100,000 by the time they made a claim.

Mark Kachor, managing director of research house DEXX&R, explains that this gave people an incentive to stay on benefits because they were earning more on claims than at work and insurers were finding the length of claims was rising. To combat this trend, insurers began introducing indemnitystyle contracts where the benefit was based on the policy holder's income at or about the time of the claim. It may, for example, be based on income in the past 12 months or the highest 12month period in the past three years.

Although these contracts are cheaper, they can result in a nasty surprise when people with fluctuating incomes such as the selfemployed make a claim.

How is disability defined?

"I would say the biggest area of contention between insurers and individuals at claim time lies in definitions," says Roy Palic, a financial planner at HLB Mann Judd.

Disability definitions vary widely, ranging from whether you are unable to perform a specific occupation at one end of the spectrum (you are a surgeon and your hand is broken so you cannot perform any surgery) to being unable to work at any job at all.

MLC, for instance, has a dutiesbased definition whereas Zurich has an incomebased definition. Zurich's policy will pay out if you are unable to produce at least 80 per cent of your previous income through your usual occupation because of sickness or accident.

Michael Browne, general manager of marketing at MLC Insurance, says it will pay a claim as long as the policy holder is unable to do one of the important duties of their occupation necessary to producing an income.

But others may pay only if the policy holder is unable to do some or most of their important duties, says Mr Palic.

Some insurers have tightened their terms by building a second, broader definition of disability into contracts for longerterm claims.

How long will benefits be payable?

In the past, insurers offered products with "lifetime benefits", making it possible to receive benefits until the age of 95.

But these benefits have been dropped from new products as insurers have reviewed their product design.

"The intention of the policy is to replace a person's income and people don't usually work until age 95," says Tassin Barnard, national manager for risk at Axa and AC&L.

These days people can take out cover paying benefits up to the age of 65 but even then some insurers are taking steps to limit the cost of longterm claims.

Craig Dangar, technical services consultant with Count Wealth Accountants, says a growing number of insurers are offering claimants a lumpsum payout if they are unlikely to ever return to work.

This minimises the cost involved in administering a longterm claim and the claimant no longer has to keep seeing doctors.

However, people should always seek tax advice before accepting a lumpsum payout.

Premiums on incomeprotection policies are tax deductible so any payout is treated as income for tax purposes.

What level of cover is available?

Jodi Murray, business development manager at RetireInvest, says the riskier an occupation, the harder it is to get cover.

A fireman, for instance, may get cover only with certain insurers and they may limit the payout of benefits to two or five years. Or they may only agree to provide cover if they can reserve the right to renew the policy each year, she adds. So, someone thinking of switching policies needs to be aware that insurers are changing their views on occupations.

In the past, insurers have targeted whitecollar workers because they were seen as less prone to injury than bluecollar workers.

But they have found that whitecollar workers are more likely to suffer from stressrelated illnesses, which are associated with longer periods off work.

As a result some insurers have recently rerated the premiums payable by professions such as doctors and lawyers to reflect this.

In some cases, these professions are now paying 40 per cent more in premiums than other professionals, says MLC's Mr Browne.

Insurers are also trying to tackle the problem at the outset by asking more questions about treatment or counselling for depression and time off work due to mental illness in application forms.

"They are looking a lot more closely at personal statements for depression and family history of depression," says Ms Murray. "If there is an indication of anything they will write away to the doctor and get a lot more information."

Consumers may also be offered a discount if they agree to exclude for claims relating to mental disorders or a twoyear limit may be placed on benefits for these conditions.

What do I need to disclose?

Nondisclosure of preexisting conditions or previous history is one of the most common causes of disputes in the incomeprotection market, says Alison Maynard, chief executive at the Financial Industry Complaints Service.

She warns that people who have deliberately chosen not to disclose preexisting conditions or previous history can end up having their contracts cancelled if it is discovered.

"At least if you disclose and the insurer refuses to give you cover you can go elsewhere and they may just exclude those things," Ms Maynard says.

Back and mentalrelated preexisting conditions are two areas insurers are particularly sensitive about.

Does my super fund cover me?

Many superannuation funds offer a group incomeprotection policy. These can be particularly attractive for someone who would find it hard to get insurance. As part of a group scheme you are automatically accepted.

However, most of these schemes will pay benefits for only two years and if you leave your employer you will need to take out a new policy or arrange to continue the policy on an individual basis within a limited timeframe.

Have I got the best policy for me?

When premiums are going up it is tempting to switch insurers.

There can be a wide variation in the cost of income protection by up to several thousand dollars a year.

But Ms Murray cautions consumers against chasing the cheapest product when the market is in such a state of flux.

Someone may switch to a policy with a lower premium this year only to find that the premium rises significantly the next. They will also have to provide fresh medical information.

Instead, look for other ways to reduce your premium.

Opting for a 90day waiting period rather than the usual 30 days can make a significant difference, for example.

Alternatively, if you are buying a new policy, ask if the recommended insurer offers a discount on the premium if your financial adviser is prepared to accept less commission.

Commissions paid to financial advisers can represent about 70 to 80 per cent of the first year's premium, says DEXX&R's Mr Kachor.

"The important thing to realise is there is room to negotiate," he says.

Finally, remember, the cheapest cover may not always be the best one for your circumstances.

Risk products

Life insurance pays a lump sum if you die or become terminally ill. It should be taken out by anyone who has continuing financial commitments, debts or dependants.

However, cover for a non-income earning spouse may also be important if they are responsible for childcare.

Trauma insurance pays a lump sum if you suffer one of a list of specific conditions including heart attack, cancer or stroke.

Again, it can be taken out to cover both an income earner and a non-income-earning spouse.

Income protection pays a monthly benefit of up to 75 per cent of your income if you are unable to work because of sickness or accident.

Fact file

Premiums are tax deductible but benefits are taxable.

States of disarray

The Australian income-protection market is not the only one to suffer from problems with poor claims experience.

Leon Beale, head of risk products at Colonial, says United States insurers lost billions of dollars on income-protection insurance. "Now there's only a few players left in the market," he says.

To combat their problems, these insurers have moved to "consumer unfriendly" contracts with 90-day waiting periods and benefits based on 50 per cent of income, he says.

In the Australian market the desire to avoid taking such drastic steps is leading to some innovative solutions, such as a product launched by Lumley Life.

Frank Smith, deputy chief executive at Lumley Life, says: "We (decided) to design a contract that's 30 to 40 per cent cheaper than our existing product in the market but that will pay genuine and serious claims."

The product pays benefits from day one to age 70 if someone is unable to work because of one of a list of major disabilities. But benefits will be payable for only two years if the claim is the result of any other injury or disability.

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