Why the changes to income protection?
In response to the $3.7 billion losses experienced in the sector in the 3 years to the end of 2020, and insurer inaction, Australian Prudential Regulation Authority (APRA) has stepped in to try and improve the sustainability of income protection policies[1]. At the end of 2019 APRA informed life insurers they had to make major changes to income protections policies starting from 31 March 2020 to 1 October 2021. One of these changes has been postponed to 1 October 2022.
Who is APRA?
The Australian Prudential Regulation Authority (APRA), licenses banking, insurance and superannuation businesses, and supervises them to ensure that the financial promises made to their beneficiaries (e.g. policyholders) are kept. APRA’s supervision aims to identify potential financial or operational weaknesses as early as possible, and ensure they are rectified before they can threaten its safety and soundness[2].
What is income protection?
Income protection, also known as ‘salary continuance insurance’ or ‘disability income insurance’, insures one of your most important assets, your income. It’s designed to pay you a benefit if you are unable to work for a period of time due to illness or injury[3].
Initial changes
Historically, income protection policies were provided as either an:
- Indemnity value policy, where the amount you’re insured for is a percentage of your salary when you make a claim; or an
- Agreed value policy, where the amount you’re insured for is a percentage of an agreed amount when you sign up for the policy. These are generally more expensive but could be useful if you have income that changes from year-to-year[4].
The first big change took effect on 31 March 2020, when new applications for Agreed Value income protection insurance were discontinued. This particularly affects self-employed, whose income can vary widely each year.
What other changes are expected?
The following changes are to be implemented no later than 1 October 2021[5]:
- Limits on income protection payments for the first 6 months. Rules will be in place so that benefits cannot exceed 90% of earnings for the first 6 months and drop to a maximum of 70% of earnings after that. This is to encourage retraining, rehabilitation and return to work.
- Benefits will be based on the last 12 months of earnings, if you have a predominantly stable income. Previously some policies allowed you to look back 2-3 years and make the best 12 month period the basis of your claim. This look back will now be based solely on the past 12 months’ income.
- Reducing the risk of longer benefit periods. This may mean stricter disability definitions for longer benefit periods.
APRA has recently announced it will postpone implementation of the policy contract term measure to 1 October 2022 [6].
- Income protection contracts may not exceed 5 years. This means terms and conditions that used to be able to be guaranteed until age 65, now need to be renewed and updated every 5 years, subject to an analysis of changes in your occupation and financial circumstances.
What happens to existing policies?
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 should continue. Existing Agreed Value policies terms and conditions will generally not change, however, the premiums charged may change.
What should I do?
Insurers are starting to develop and release new income protection policies which meet the guidelines set out by APRA. It’s important to remember these changes are all aimed at making income protection a more long-term viable proposition.
If you have been considering income protection or would like to have your existing policy reviewed, it may be useful to reach out to us and discuss the options available to you. Feel free to drop us an email or call Anthony directly on 0466 438 412.
[1] https://www.ifa.com.au/news/29441-apra-changes-to-strip-back-long-term-claim-benefits
[2] https://www.apra.gov.au/what-does-apra-do/
[4] https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance
[5] https://www.apra.gov.au/final-individual-disability-income-insurance-sustainability-measures
Disclaimer:
The articles in this newsletter are of a general nature only and are not to be taken as recommendations as they might be unsuited to your specific circumstances. The contents herein do not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. Your adviser or other professional advisers should be consulted prior to acting on this information. This disclaimer is intended to exclude any liability for loss as a result of acting on the information or opinions expressed.