For those advisers that like the idea of a lower, non-taxable, income protection benefit the potential for a review of the taxation of income protection adds risks, or complexity, or both.
For example, if a future review were conducted by Inland Revenue, and the position were changed so that all IP benefits (AV, LOE, or Indemnity) are deductible and taxable then those clients with existing AV benefits may have a problem. If the tax position changes for in-force contracts then they probably need to buy extra cover. A boon, perhaps, to insurers and advisers, but difficult for some clients that have developed health problems in the meantime. Alternatively the change could apply from a certain date forward, adding to the complexity of giving advice to clients with in-force AV contracts which will remain non-deductible and non-taxable. Insurers could make like easier for advisers by allowing a one-off increase to the benefit if it is deemed to be taxable. They are only likely to be tempted to do this if there were better information and enforcement around the taxation of IP benefits.
We continue to hear of complaints that claimants do not declare their income and then discover that they have unpaid tax problems to add to their health issues. Which brings us to the other eventuality: assuming everything becomes non-deductible and non-taxable, then the reverse problem applies. Some may seek to reduce their benefits, a one-off hit to insurers. But the gains to consumers and reduced replacement ratios may be worth it. Each of these costs probably still outweigh the complexity of staying with the current situation.