Imagine this: a hardworking junior manager has finally been recognised for all his or her hard work and won the big job: a step up from, say, $60,000 a year to $120,000 plus car. Wow. Good for them!

Being a good conscientious person right after getting the new job they call you up and arrange to review their insurance package. Happily you set them up with a good loss of earnings or indemnity contract.

Three months later they get bad news and are disabled, laid low with something out of the blue, and although it is covered – that’s the good news – the bad news is that they won’t be getting their full sum insured.

This was a real case, and that situation was discovered by an adviser recently, very surprised to see that the ‘best 12 continuous period of 12 months in the last three years’ would have an unfortunate impact on the claim.

That’s because only three months on the new package would be dragged back down by nine months on the old salary – meaning a definition of pre-disability income that is much lower than the actual current income.

You might grumble that the adviser should have placed them in a premium indemnity or loss of earnings contract with a ‘best of both worlds’ definition. Alternatively an Agreed Value product would have done the job.

However, I think that there is an issue with product design.

Having underwritten the client on the basis of the $120,000 plus car then I think the insurer should have a provision to ensure that is what they pay to a claimant rapidly disabled.

I don’t think the intention of the financial underwriting provision is to penalise someone like this – it is to ensure a genuine principle of indemnity is applied if the insured’s income has reduced permanently. The wording could be changed to recognise this.

In fact, the claim could be paid, but that’s not a matter to discuss in an article.