Income protection insurance explained
If you were to suffer an illness or injury that prevented you from working for a period of time, how would you fare financially?
The answer for many people, particularly those who are self-employed or work in a small business, is that the situation would be fairly dire. This is a huge risk for your and your family’s financial future.
That’s where income protection insurance comes in. Depending on the type of policy you have, you may be eligible to receive an agreed amount – usually up to 75% of your income – for a certain amount of time.
Income protection insurance will not cover you if you are stood down or lose your job. But it will help ease the pressure of paying the bills if you are unable to work due to injury or disability.
Why the need for change?
Over the five years to 2020, the insurance industry lost approximately $3.4 billion on income protection insurance products. Insurance companies are haemorrhaging money. And that’s not good for anyone.
In 2019, the Australian Prudential Regulation Authority (APRA) stepped in to stop insurers offering ‘agreed value’ policies to consumers. This change went some way to stemming the losses… but it wasn’t enough.
In the period from December 2019 to October 2020, the industry lost a further $1.4 billion on income protection insurance products. This is unsustainable and threatens the future of a product which many people rely on for peace of mind for their income security.
In March 2020, the APRA review and program of work were put on hold as insurance companies turned their focus to the pandemic response.
Given the huge losses in that period, APRA has determined that action must be taken now.
What the changes to income protection mean for you
From 1 October 2021, all new income protection policies will have the following limitations applied:
Only income earned in the last 12 months will be able to be used as the basis for the claim. Currently, some policies allow you to look back three years and use your best 12 months of earnings. For those who have fluctuating incomes, this could mean being paid out significantly less.
Currently, some income protection policies have ancillary benefits that can mean you are paid 100% of your pre-disability income in the earlier months of claim before dropping to 75% or 85% of your pre-disability income. Going forward, this will be limited to 90% in the beginning, before dropping to 70% for the remainder of the policy.
The biggest change is that terms and conditions of the income protection policy will no longer be guaranteed through until age 65, like they currently are. The insurance company will have the ability to modify terms on your policy every five years. So things like a change to your occupation, change in financial circumstances, or you taking up a dangerous pastime will be reviewed and updated every five years. Importantly, there will be no medical review necessary every five years, but other changes in your circumstances can change the cost and benefits of your policy.
In making these changes, APRA is ensuring a sustainable future for income protection insurance in Australia. But they have also called out that the industry must continue to meet the needs of consumers.
While the APRA measures are about the financial viability of these products in the market, there is also an expectation that policyholders have certainty of coverage and premium stability as well as clear and objective criteria for their eligibility in relation to claims
Importantly, if you have an existing policy, the terms or conditions cannot be changed to negatively impact you while you are still funding the premiums. You can also take out a new income protection policy before 1 October 2021 under the old, more favourable rules. If you or a loved one are considering obtaining or changing your income protection, now is the time to act.
There is no doubt that the insurance industry is now going through the biggest shake up we have ever seen. And that’s a good thing.
If you are concerned about the future of your income protection insurance policy or have questions about what the changes mean for you, we are here to help. Our team is firmly focused on helping our clients plan for the future, so please contact us to find out how we can help you today.