- Published on 20 Oct 2021
Your future earning ability is arguably your most important asset and it is likely more important to protect this than insuring your home.
Income protection insurance is an essential tool to partially replace your income in the event of serious illness or injury (meeting the definition of a claim) that stops you from working. Premiums are generally tax-deductible making this a more affordable option than you might think.
It is important to be aware of significant changes to income protection policies, some of which are already in place and some that come into effect in October 2021. The changes are a result of the insurance regulator intervening into the industry to address substantial and unsustainable ongoing losses on these policies.
We have prepared the following summary of reforms to the insurance industry.
No new ‘Agreed Value’ income protection policies
Since 31st March 2020 insurers have no longer been allowed to offer Agreed Value income protection policies to any new clients but may uphold existing policies. Agreed Value policies refer to policies where the monthly insured amount is agreed upon at the commencement of the policy, without needing to prove what you were earning at the time of claim. This provided additional security for self-employed persons whose annual income may fluctuate.
While existing Agreed Value policies are not affected, all new offers are based on an Indemnity Value where the value of the claim paid is based on the amount of your income in the past year, or two years, dependant on the terms and conditions of the policy.
Removal of “guaranteed renewable” on new policies
Currently, insurers guarantee that policies will be renewed each year for at least the same level of cover and under the same (or improved) terms and conditions over the contract period (e.g. to age 65), providing you continue to pay your premiums on time.
From 1 October 2021, insurers will no longer be able to offer policies that are “guaranteed renewable”. Instead, policies will be subject to a review every 5 years regarding your income, occupation and the generosity of the terms and conditions of your policy. This means the insurer may decide to change the terms and conditions you need to satisfy to make a claim. The contracts can be renewed without medical reviews for further periods (not exceeding 5 years).
Existing policies and policies entered into prior to 1 October 2021 will continue to be guaranteed renewable for the life of the policy.
Stricter rules around disability claims and cover
From 1 October 2021 the regulator expects insurers to incorporate design features into their products to control risks associated with longer-term policies (such as to age 65), for instance, stricter disability definitions, moving from a three-tiered definition of disability (duties, hours, income) to a one-tiered definition based only on important duties, reducing the income replacement ratio after a specified period of time on a claim or adopting a stricter ‘any occupation’ definition after an initial ‘own occupation’ two year benefit period. Insurers are currently in the process of developing new policies in line with these changes.
Canstar.com.au notes "Over the time that the product has been available, the range of benefits and features offered through income protection has grown. Many policies now offer several different waiting and benefit period options, with some offering to pay more than the usual 75% of your income as a benefit, or even to pay an additional amount into your superannuation fund to cover what your employer would have paid into it if you were still working.
These extra features and benefits can be expensive for insurers when they need to make a payout, but are usually offered as a way to attract customers and therefore increase market share. However, this has been placing a growing financial strain on the industry.
As a result, the Australian Prudential Regulation Authority (APRA), the regulatory body that is responsible for the life insurance industry, has mandated that the industry change its products to make them more sustainable. The changes will mainly affect income protection policies outside of superannuation, as insurance within super is generally already in line with APRA’s changes"
If you would like to explore your options in relation to Income protection changes, why not get in touch?
LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you in establishing your personal insurance needs.
If you would like to discuss your position or wider financial planning needs, why not call us today on 03 9596-7733? There is no cost or obligation for our initial conversation/meeting.
LifeTime Financial Group. A leading privately-owned Melbourne-based Financial Planning practice with no ties to any financial institution