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Income Protection policies are changing

As of 1st October 2021, the government are bringing in major changes which will severely limit life insurance policy flexibility and pay-out generosity.

Despite income protection being a multi-billion-dollar industry, over the last 5 years, insurers have lost approximately 4.3 billion dollars. The industry has become more and more competitive since its inception in Australia 30 years ago. As insurers vied for clients and offered better and better features and competitive premiums however, the industry stopped being lucrative because insurers are now paying out more than the premiums are bringing in.

Why are changes coming?

Recently, the Australian Prudential Regulation Authority (APRA), an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia, announced that it is concerned that life companies have been keeping premiums at unsustainably low levels to compete for customers, and the industry isn’t making the profits it requires to survive. Without requiring legislation, APRA has the power to bring in sweeping changes to stabilise the industry and make it sustainable. These changes will come into force on 1st October, 2021.

What are the changes being made?

The new, significantly less generous policies will:

1. Limit the way in which ‘income at the time of claim’ is defined:

  • Previously, for agreed value policies, the monthly benefit was based on the agreed value at the time of policy commencement. Moving forward, income will be based on your actual earnings at the time of the claim, not agreed earnings.

  • Currently, to calculate actual earnings, some policies allow you to look back 3 years, find your best 12 months earnings within that 3 years and use that income as a basis for your claim.

  • Following the upcoming changes, this will be limited to looking back at the last 12 months only. If your income was lower in that 12 months, that is what your payment will be based on.

2. Pay you less in the event of a claim.

Currently, generous income replacement ratios coupled with other policy features such as partial disability benefits, can result in policy holders being better off financially after a claim, than they were before. If you are ‘earning’ more when you’re off work injured – you’re less likely to strive to get back into the workplace.

From October 1, the changes to pay-outs will include:

  • A maximum income replacement payment of 90% in the first six months and 70% thereafter

  • Indexation at CPI level

  • No cap on monthly benefits

3. Effect how and when you return to work

For policies with long benefit periods, APRA will now require stricter disability definitions:

  • One of the biggest changes expected are the conditions you must satisfy to be considered totally or partially disabled. Previously, this was defined as being unable to perform your ‘normal job’.

  • Previously, policyholders were measured against their ‘own’ profession and may have been able to claim indefinitely if they could not perform it. The new changes will mean that after two years, claims will be assessed on your ability to work in ‘any occupation’, based on your training, education, and experience, to a role that the disability doesn’t prevent you from performing.

  • An ‘any occupation’ definition is a much broader definition, so you might have to return to work in a different role and before you are ready.

4. Have a maximum payment period of five years, with a right to renew cover at that time:

  • Income protection will no longer be guaranteed until age 65 like it currently is.

  • Changes to your occupation, financial circumstances, or you taking up a dangerous pastime, will be reviewed and updated every 5 years which can change the cost and benefits of your policy wildly.

What does this mean for existing policyholders?

If you have an existing income protection policy which includes a ‘Guarantee of Renewability’ in the policy wording, that is, the policy is automatically renewed each year, your policy will continue with no changes. These are often referred to as Underwritten Policies.

Note; most working Australians have default insurance cover through their Superannuation. This cover is expected to change for the worse.

Why is income protection so important?

Without income protection you are putting your financial future at risk for not just you, but also your family. No matter what changes come through the insurance industry, it is best to consider income protection insurance before it’s too late and you find yourself in a situation where you need it – to supplement your income when you are injured and unable to work for short periods or to receive upfront payments for specific injuries or diagnosis of a disease like cancer.

Making sure you’re covered

These are the most sweeping changes we have seen in the income protection marketplace. They are aimed at making income protection a more long-term viable product for insurance companies to sell, but it means they will be less attractive products for consumers than the current ones.

There’s still time to lock in income protection before the changes in October 2021 come into effect.

If you don’t currently have income protection or aren’t sure your existing policy is right for you, please reach out to ensure your policy falls under the current (more generous) arrangements.

Typically, the process of obtaining cover can take approximately 6 to 8 weeks, so factor this timing in when getting in touch.