Major Changes To Income Protection Policies
Effective 1 October 2021
There are some major upcoming changes to income protection, effective 1 October 2021. Importantly, if you are considering applying for income protection, now is the time to do it.
There are 4 major changes;
- Indemnity definition will be the previous 12 months only; at present, it is the best 12 months, of a 3 year period (insurers vary, some only do the best 2 years) This is particularly important for females who may be taking maternity leave in the future. At present those who have policies in place, the insurance company would look at the best year of income over a 3 year period. With the new rules, they will only consider the previous 12 months of income. For example, if you stopped full time work in December, for 6 months mat leave. And you needed to make a claim in February. They would look at your income 12 months previous to Feb, which would be ok. But if you needed to make a claim in say August, they would look at your 12 months income from July, meaning there would be 6 months of those 12 months where you haven’t earnt employment income. We generally wouldn’t recommend reducing your cover during this period, as you would need to be fully underwritten to increase it in the future, but given you are healthy, this could be an option, it is really a case by case basis.
- Reduced cap of 70% of earnings; with super included. Currently you are covered for 75% of your income, and you can decide to include super on top of this. Now it will be 70% of earnings which includes super. Example; if someone was on $100,000, they would be covered for a maximum of $70,000 and $10,000 of this would go into super. With a cap of 10% super maximum.
- Long Term claims; For claims longer than 2 years, the occupation rating will change from “own occupation” to “any occupation”.
- 5-Year Health check; this has been pushed out until October 2022, as it will be too hard to police. What this means is, after a the 5 year period, a new policy must be entered into that reflects the current market terms and conditions. If a policyholder enters a new contract after the initial 5 years, medical underwriting is not required but any changes to the policyholder’s occupation, financial circumstances and dangerous occupations or pursuits or pastimes must be updated and reflected in the new policy. Insurers are also unable to extend a current policy even if the circumstances are the same. A new policy agreement must be entered into.
You can rest assured that if you already have an income protection policy in place, this change does not affect your policy.
For some background information, APRA implemented significant changes to income protection policies in Australia. Over time, due to the competitive nature of the industry, the features and benefits of income protection policies have grown to a point where claims paid are consistently exceeding premiums received making the industry unsustainable. In fact, income protection departments of Australian Life Insurers have lost approximately 4.3 billion dollars over the last 5 years.
APRA has stepped in to address the situation and regulate the market to ensure it is sustainable. The measures imposed by APRA will significantly affect income protection policies entered after the 1st of October 2021. Importantly, there is no requirement for legislation to pass to implement these changes.
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