Australian Prudential Regulation Authority (APRA) is making changes to income protection policies to ensure the product can continue to be offered in the market. This article outlines the changes coming into force from October 1, 2021, and how these changes may affect you, whether you have an existing policy or not.
WHY ARE THE CHANGES HAPPENING?
The income protection sector has lost more than $3 billion over the last 5 years, after paying out approximately $5 billion in claims during this period (KPMG, 2020). With generous products being offered by insurers to win business, a 53% increase in mental health claims over the last 5 years, and a 36% increase in length of claim time, changes are needed to ensure the industry and income protection product is sustainable (KPMG, 2020).
In a recent insurer webinar hosted by TAL Insurance, it was stated that the original purpose of insurance was not intended to put the claimant in a better position, but to provide a level of cover throughout a time of need. Geoff Summerhayes of APRA said, “life [insurance] companies have been keeping premiums at unsustainably low levels and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work”. Changes need to be made to ensure the longevity of income protection policies.
WHAT IS CHANGING?
One key change to income protection policies occurred on April 1, 2020, namely removing the agreed value. This change means a claimant’s income is assessed at the time of claim, as opposed to at the time of application. The largest effect is likely to be felt by those with fluctuating year-to-year incomes such as the self-employed.
The biggest changes will be imposed for all new policies from October 1, 2021. These are:
- Income replacement ratios to be reduced from 75% to 70%. This means in the event of an income protection claim after October 1, 2021, the claimant would receive up to 70% of their income after 6 months of the claim.
- During the first 6 months of a claim, a claimant is entitled to up to 90% of their income, depending on the policy they have entered.
- Income will be calculated over the 12 months before the claim, compared to some current policies which use the highest rolling 12-month income over the last 2 or 3 years to smooth out fluctuating income.
- Guaranteed renewable policies will no longer exist. Long benefit periods, such as to age 65, will be managed and reviewed to help ensure there is motivation to return to work. Insurers understand that long-term claims are costly to businesses and in effect, cause premium increases for existing clients.
- This may include changing from “Own Occupation” to “Any Occupation” definition after 2 years on the claim. “Own occupation” refers to the individual’s job when they make a claim, “any occupation” refers to an occupation the individual can fulfil, despite still being unfit for their own occupation.
WHAT ACTIONS CAN YOU TAKE AHEAD OF THE CHANGES?
If you already have an income protection policy:
No immediate action is required. You will be able to maintain your policy. However, a review to ensure the policy is appropriate is encouraged.
If you do not have an income protection policy:
Until October 2021, you can still take out an income protection policy that has a 75% income replacement ratio, an indemnity definition with the best 12 month income period over 3 years, and many additional benefits such as a critical illness benefit, defined/scheduled injury benefit, a bed confinement benefit, and minimum weekly working hours.
WITH YOU ALL THE WAY
Find out more about Income Protection and how it works in our guide Income Protection: Your Top Five Questions Answered. With the changes set to take effect from October 1, this is an opportune moment to review your existing policy or understand your options. Feel free to reach out at any time.
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