Income Protection update – Major changes you need to know.

In response to the continuing losses suffered by life insurance on income protection policies, the Australian Prudential Regulation Authority (APRA), the regulator of Australia’s life insurers began a comprehensive review of the insurance industry on 2 December 2019. APRA came up with numerous proposal regarding the design of policy and charges to boost the viability of the income protection sector.

The implementation of the proposals will usher in some crucial alterations in the industry of personal insurance that have never been seen. The new proposal will not affect any existing policyholders of income protection but will apply to new policies, or an increase in cover level.

APRA has proposed various initiatives for the consideration of the industry, on “features that are very generous and clauses that, in some instances, actually disadvantaged policy holders who returned back to work.” APRA anticipates insurers will stop the provision of some product features to handle this in the future.

The proposed changes

The availability of the Agreed Value income protection will cease for new policies beginning 31 March 2020. Agreed Value means you are locking in your income at the time of application (same as the agreed Value of car insurance), without the need to prove your earnings at time of claim. This is especially attractive to self-employed individuals, where there income can fluctuate from year to year. In this scenario an Agreed Value policy would provide more security for the insured as his income has been underwritten at the time of application, not at the time of claim.

The anticipation is that insurers will cease providing various ancillary benefits beginning July 2021, with the two significant alterations including:

  1. Policies will stop being “guaranteed renewable.” This means that the insurer can update the terms and requirements of a plan and re-assess the income of the policyholder and their job position after every five years. This differs significantly to present policies, which restricts the insurer to the terms and conditions from the start of the policy, and there cannot be a worsening of the terms and conditions. At present this is a massive advantage for the insured at an enormous cost to the income protection providers and industry as a whole. This implies that:
    If you change occupation to something that is deemed to be more “dangerous” or your earnings were less (maternity leave, redundancy etc.) and there was a reviewing of the policy within that five-year duration, you may find an increase on the cost of the cover or the insurer is not providing you with any protection all protection. Of special attention, at the five-year duration, the insurer may also choose to alter the terms and conditions you must fulfil to claim, making a successful claim much harder.
  2. Long term benefit policies (usually “to age 65 or 70”) should have regulation in place to minimise the progressive claim, for example, enacting a strict description of disability for long benefit duration.

What happens now?

The alterations will follow a process of consultation between APRA and industry bodies such that there can be variations of these steps, which are unlikely to be satisfied until later within the year. Presently, we are aware of the changes of Agreed Value that begins on 31 March 2020. Still, we anticipate insurers will start enforcing the new regulations over the year that follows, especially as they have a chance to gain from minimal payments of claims from new claims. As a result we strongly suggest that clients speak with their adviser to ensure the policy they hold is appropriate.

What you should know.

  • Your most significant assets in life is not your home or superannuation; it is your ability to earn an income. the average Australian earns roughly $3 million over a working lifespan of 40 years. Getting the most appropriate protect for your most valuable makes sense, right?
  • The income protection premiums are tax deductible, allowing you to claim between 19%-47% of the premiums payable depending on your marginal tax rate.
  • Income protection policies can provide additional advantages, for instance, advance payment for a few days hospitalisation, advance payments if suffer a broken bone or advance payment if you have a diagnosis of significant illness or cancer.
  • Typically, income protection cover that your super fund provides may have low quality features, lower benefit periods, lower insured amounts and potentially longer waiting periods.
  • If you have not already prepared your income protection cover, this is the right time, before the introduction of these changes. If you currently have cover, but it has been a while since you reviewed it or maybe you only have cover through your super fund, consult with a GWP Financial Adviser to have a review of your appropriate cover.