Income protection policy changes for October 2021
The income protection segment has been hit by over $3.4 billion in losses and (I suspect this number to rise considering the potential impact of COVID19 on mental health) over the last 5 years. To overcome this challenge for life insurers, in late 2019, Australian Prudential Regulatory Authority (APRA) advised life insurers that they will be looking at overhauling income protection policies. This process started back in March 2020 by removing “agreed value” contracts.
If you are not completely familiar with income protection, it is a policy that pays a monthly benefit of up to 75% of your pre-tax income (including superannuation) if you are unable to work due to an injury or illness. It covers you anywhere in the world 24/7.
The remaining changes are to take place as of 1st October 2021 and are summarised below:
- Benefits based on your annual earnings of the last 12 months immediately prior to injury/illness
Currently, you can obtain policies that allow you to use your best 12 consecutive months of income in the previous 3 years before the time of illness or injury. Under the new changes, this luxury will be removed, and it could have a significantly negative effect on your claim, especially if you are self-employed or if your income fluctuates.
There may be an exception for policyholders with variant income based on the average earnings appropriate to their occupation, but we are yet to see how this will be interpreted and implemented by insurers.
- Reducing the risk associated with longer benefit periods and limitations
To encourage policyholders to return to work as soon as practicable, insurers will have measures in place to reduce the risk of long-term benefits. This means stricter disability definitions, moving from a three-tier definition of disability (duties, income, hours) to a single-tier definition based only on essential duties, reducing the income replacement ratio after a specified period of time on a claim, or moving onto an “any occupation” definition after an initial “own occupation” for the first two-year of the benefit period.
- Guaranteed renewability to be revised every 5 years (come into effect no later than October 2022)
Currently, insurance policies are guaranteed to be renewed each year of at least the same level of cover and under its current (or improved) terms and conditions over the contract period (e.g. to age 65/70) providing premiums are paid on time.
Under the new changes, income protection policies can no longer be guaranteed under such terms. Instead, policies will be subject to a review not exceeding 5 years regarding your income, occupation, and the generosity of the terms and conditions of your policy. This means the insurer has the discretion to issue a change in the terms and conditions of your policy based on changes in your income and occupation at renewal time (e.g. 5th year). The contracts can be renewed without medical underwriting for a further term (not exceeding 5 years) again.
How will these changes impact you?
- If you have a current in force income protection policy – these changes will not impact your current policy unless your policy lapses or you change insurers after October 2021. This is the time you may want to consider reviewing your existing policy if you haven’t for some time.
- If you do not have an income protection policy – NOW is a great time to explore your options and apply for the current contracts prior to October 2021 so that the new changes do not impact you.
We can and would love to facilitate a review of your existing policy or advise you on taking out brand-new income protection. Please contact our team at Wealth of Advice on 02 9160 4800 or complete the “get in touch” form below and we will get back to you within 24 hours.
Consider our Financial Disclaimer Before Making Your Decision