Recommend indemnity values over agreed values
An agreed value income protection policy pays an agreed value to the holder if the insured event occurs. The amount insured is typically based on the client’s income at the time the policy is taken out, and is subject to various limits. In contrast, an indemnity policy pays a percentage of the client’s income at the time that the insured event occurs. Again, this is subject to various limits.
Indemnity policies usually have lower premiums. This is because there is less administration required on the insurer’s part when an indemnity policy is taken out. With an indemnity policy, the work of determining the client’s level of income is delayed until (and if) the client makes a claim. In an agreed value policy, the insurer completes this administrative task at the time the policy starts. Because most clients do not ever make a claim, this means that the insurer faces less administration overall for clients who take indemnity policies.
Indemnity policies suit clients with stable employment situations where their income is not likely to fluctuate, and certainly not likely to fall over time. People in secure employment where longevity is the base for income levels, such as public servants, are often suited to indemnity policies. SOAs that recommended indemnity policies need to state why that type of policy is suitable, and include a caution about the fact that this cover may not remain suitable if the client loses or resigns from their job, or faces some other situation in which the basis of their income changes.
Agreed value policies typically suit clients with less stable income situations. This might include self-employed people or people employed in less stable or enduring employment. Employees on fixed term contracts, for example, are often better suited to agreed value policies. As agreed value policies attract higher premiums than indemnity policies, effective SOAs need to spell out why the higher agreed value option has been recommended.
The point is this: as with most areas of financial planning that involve choice, there can be good reasons for making a particular choice. The SOA should make these reasons clear to the client – and to anyone else who might read the SOA at some future time.
Minimising the premium relative to the sum insured is a good reason for recommending an indemnity policy (and only doing the extra paper work down the track if the insured event actually occurs).
Recommending premium structures with lower commissions helps show your advice is in your client’s best interests and prioritises your client’s interests over your own interests.