Big changes to how income protection plans are managed, and the terms that are available, come into effect from 1 October 2021.
In this article, read about the changes and why they have been made. You should also be aware of an important window of opportunity that will be closing soon, and why you need to act now to take advantage of it.
Protecting one of your most valuable assets
Income protection is based on the premise that one of the most valuable assets we all have is the ability to work and make money.
It therefore considers what would happen if that asset were harmed in any way. What would be the impact if you were unable to work for an extended period, and therefore unable to protect and provide for your loved ones?
Remember, most employers will only pay 10 days of sick leave each year. So, if you suffer an illness, or have an accident that keeps you off work long-term, you will soon deplete your savings. Likewise, if you are self-employed or a business owner, the same would apply.
To guard against this possible eventuality, income protection provides you with income in the event of an illness or accident that results in you being unable to work for any length of time.
For a monthly premium, you will be protected and, in the event of a claim, you’ll receive a monthly payment of 75% of your salary. That will enable you to maintain a decent standard of living and pay recurring expenses – such as your mortgage and household bills.
Background to the changes
All insurance products in Australia are regulated by the Australian Prudential Regulatory Authority (APRA).
A key part of their role is the responsibility to protect consumers, by ensuring that insurance products available provide value for money and provide the benefits and protection that they are supposed to.
APRA are also responsible for the companies that sell the products (“providers”).
Providers have struggled for some time to sell income protection profitably. The problem is so profound that, in the five years up to September 2019, insurance companies lost over $3 billion.
In that month, APRA confirmed that they were planning to take regulatory action to improve the market. They said that:
“The life insurance industry’s ongoing failure to design, price and manage [income protection] in an appropriate manner has resulted in material losses from this product, notwithstanding significant premium increases.”
Not only were insurance companies losing money, but policyholders were being hit with substantial increases to their monthly premiums – far more than they expected when they originally took the plan out.
Despite APRA issuing an “industry letter” (think of it as a kind of written warning) to providers asking them to take steps to improve income protection plans, it was clear that this was insufficient, so they have been forced into taking more extensive action – hence the changes now being made.
Changes from 1 October
APRA have instructed that the changes come into force from 1 October 2021. The five key changes that could impact on consumers are:
- The amount of someone’s income at risk at the time of a claim – which therefore determines the amount of benefit paid out – needs to be based on information not more than 12 months old. If someone’s income fluctuates, it should be based on their average annual earnings.
- The maximum benefit payable is now 90% of earnings for six months, then reducing to 70% thereafter. This is also now subject to a maximum of $30,000 per month. Benefit income can increase each year, but only at the rate of inflation.
- The maximum term allowable for a contract is five years.
- A policyholder can renew a policy for a further period, not exceeding five years. This can be done without any further medical evidence being required, on the terms currently offered by the provider.
- The way your occupation is defined is changing from a three-tier definition to a single tier.
Why you need to act urgently
Anyone purchasing a new income protection policy from 1 October 2021 should expect fewer features, options and benefits than have previously been available.
The change in “tiers” also means that, if your occupation changes after 1 October, your monthly premiums could easily increase substantially.
This means that there is a very short-term deadline for anyone looking to take out a policy in the near future. You need to set up a new plan before 1 October to take advantage of the current, more beneficial, product terms.
Getting financial advice from an expert will become important. An experienced adviser will be able to review your current position and recommend a course of action that best suits your individual needs.
Get in touch
Please get in touch with us if you would like to discuss your income protection requirements. We have extensive experience in this market and can advise you of the best course of action.
But don’t leave it too late.