We spoke about major changes to Income Protection last year in April. The Australian Prudential Regulation Authority (APRA) who regulates life insurance companies is making further changes that will take effect from the 1st of October this year.
What is Income Protection Insurance?
- Provides an ongoing income in the event you are sick or injured and unable to work for an extended period.
- Extremely important as it allows you to continue paying bills, the mortgage and put food on the table while not working. It protects your biggest asset, your ability to earn money!!!
- Can generally insure 75% of your gross income.
- You pick a waiting period (14,30,60,90) and a benefit period, which can range from 2 years, 5 years, 65 years or all the way to 70 years old in some cases.
- Income Protection insurance contracts can either be Agreed Value or Indemnity.
- With an agreed value policy, the monthly benefit is based on income declared when the policy holder first applied for cover. This can also be endorsed at the time you apply for cover with proof of your financials.
- With indemnity value, your cover is calculated on your income at the time you make a claim. So if your income has fallen in the period before the claim, you get less.
- Contracts are guaranteed renewable. This means as long as you pay your premium the insurer can’t reassess you for changes in health or occupation for the life of the policy.
What further changes is APRA making?
- After 6 months you can only be paid 70% of your gross income. So the actual replacement of income is 70% long term instead of 75%. Not ideal, given the payments are taxed.
- Earnings to support your claim cover only the last 12 months and not up to 3 years in retrospect. When you claim on income protection your income at the time of claim needs to support the actual insured amount. Right now the insurer will look back over the past 3 years and use your BEST 12 months of earnings. Post 1 October the changes will LIMIT this to only the last 12 months. This could be a disaster for someone who has time off work and especially for those who are self-employed where income can fluctuate.
- Changes to claim assessment. Right now you can have your claim assessed under “own occupation” which ensures individuals are protected if they become ill or injured and are deemed unfit to perform their own occupation. After the changes claims will be assessed under the “own occupation” definition for ONLY the first 2 years under claim, then the definition will change to an “any” occupation definition based on training, education and experience.
- Changes to the way Disability is Defined. Right now good policies have what is called a three-tier definition of disability. This is very important as you can prove you are partially disabled by proving any of the three:
- Duties definition: You can claim a benefit if you become unable to perform one or more income-earning duties due to sickness or injury.
- An hours worked test: You can claim a benefit if you are unable to work your usual hours. If you are unable to work more than 10 hours per week, an insurer will normally consider you totally incapacitated. However, if you are returning from injury or sickness, you might not be able to work a full week but might want a staged return to work where you work more than 10 hours per week. A good quality policy will provide this.
- Loss of income test: If due to sickness or injury your income has dropped by 20 per cent or more, you can claim a benefit. This will suit people who are paid on commission or are self-employed. They might still be able to perform their duties and work 40 hours per week, for example, but their volume of work has diminished. Therefore, this test will be handy.
- After the changes, this might fall back to just ONE tier definition, likely based on duties alone!
Why has APRA stepped in?
- Simply put, the major insurers have been losing money on Income Protection insurance and the regulator sees the situation as a risk to the industry as a whole.
- APRA noted that life companies have collectively lost a whopping $3.4 billion over the past five years through the sale income protection to individuals.
- They want insurers to design income protection to be more sustainable and less GENEROUS, which they have NOT done of their own accord for fear of being the first mover and losing clients.
What should you do?
- If you don’t have Income cover and think you may need it NOW is the time. If you get an application in anytime prior to the cut off date it will count under the old rules.
- Any NEW policies after these changes will be inferior.
- Existing policies will be grandfathered so if you don’t have income protection now is the time to act before the regulator closes the window on policies that are so generous insurers are losing billions.