Keeping the technical insurance talk to a minimum here. This article will ensure that you are aware of what changes are taking place in regards to income protection insurance under the following headings.
- What income protection is?
- What changes are happening?
- Why the changes are happening?
- How it can impact you?
- What you can do about it?
Important: What is Income Protection?
Income protection provides a portion of income, usually 75% of your annual salary, if you are unable to work due to injury or sickness for a certain period of time.
Income protection policies always have a waiting period and a benefit period. The waiting period is the length of time that you must be off work before being eligible to make a claim and the benefit period is the length of time you can receive payment whilst unable to work.
There are two main types of Income Protection policies Agreed Value & Indemnity.
1. Agreed Value income protection policies guarantee payment of the sum insured regardless of the life insured’s income at the time of claim.
2. Indemnity Policies don’t require proof at the time of purchase, however do require proof of income in the event of a claim.
In most instances, income protection premiums are tax deductible – that includes to your superannuation fund.
What changes are taking place now?
- No more Agreed Value Income Protection (Disability Income Insurance) policies for new customers from the 31st March 2020
- This will have the biggest impact on variable income earners that like the security of a guaranteed monthly payment in the event they are sick or injured. Typically, this would be business owners, sales professionals and employees with access to additional incentives like a bonus or commision.
What changes are proposed for next year? (expected changes July 2021) We will address these in the follow up article.
- Will no longer be able to get a “guaranteed renewable” income protection policy. That means that every 5 years the insurer can revise the terms and conditions on the policy and even re-assess a client’s occupation and the income (e.g. if you get a riskier job, you will pay higher premiums, may not be offered the cover, may change policy terms to make it more difficult to claim.)
- Longer term benefit period (like to age 65 or age 70) will have stricter definitions for ongoing claims.
- your insured income is to be based on your annual income at the time you make a claim, and are not able to look back more than 12 months.
Why are the changes happening?
The Australian Prudential Regulation Authority (APRA – the regulators for the life insurance industry in Australia) stepped into the insurance market because of ongoing losses Income Protection Insurance policies nationwide. The figure released on their page on the 2nd December 2019 was $3.4 billion in losses over the past 5 years. APRA felt the need to intervene as the re-insurers (companies that insure/provide financial protection to the insurance companies) would begin to stepping away from covering Income Protection all together.
“Disability income insurance plays a vital role in providing replacement income to policyholders when they are unable to work due to sickness or injury.”
It has been a battle for market share amongst insurers, they have been keeping the premiums at unsustainably low levels whilst having great features – in cases, put people on claim in a better position by being on claim.
APRA article referenced – https://www.apra.gov.au/news-and-publications/apra-intervenes-to-improve-sustainability-of-individual-disability-income
How can this impact you?
Let’s ignore next year’s changes for now because they are huge! For now, this will just address the Agreed Value Income Protection policy changes.
This will have a huge impact on variable income earners that like the security of a guaranteed monthly payment in the event they are sick or injured. Typically, this would be business owners, sales professionals and employees with access to additional incentives like a bonus or commision. Why?
Here is an extremely simple example with round numbers and simple assumptions.
Sales Professional – $50k base salary, average annual bonus $50 = $100k annual income
Agreed Value – verify income and apply before sickness or injury for max cover 75% + SGC of your income.
= $75k + SGC split into monthly payments
Indemnity Value (typically uses last 12 months of income) – possibly on maternity/paternity leave, missed bonus that one year and then was sick/injured. Only earned $50k that year.
= $37.5k + SGC split into monthly payments
Expenses haven’t changed – Which one do you feel more comfortable with?
What you can do about it?
- Reach out NOW, so we can work out an action plan – this might be reviewing existing cover or exploring the market to have a competitive policy to protect you.
- Ensure that if you want Agreed Value (it is not always appropriate for everyone) you begin the process to get this in order immediately. Cut off date is 31 March 2020 across all insurers.
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