Wealth Aug 23, 2021

Income protections changes coming soon

5 min read

Entourage Report 2021
Entourage Report 2021

Coming October 2021 are some substantial changes which will impact new Income Protection policies. Read on to learn what the changes are and how they might affect you.

To provide some context, minor adjustments are made continuously to insurance policies. However in March 2020 a major change was implemented, with the end of Agreed value contracts. This is not new news, but still pertinent as it tracks the history of the changes.

Since then, APRA (the Australian Prudential Regulatory Authority) has made substantial changes to the way Insurance companies design and build Income Protection policies.What this will mean is that Income Protection products will not be as generous and comprehensive as they are today. They will still offer the necessary protection that we all need, however they will be removing some of the key features and benefits of these products.

What are the changes?

From October 1 2021, insurers will limit the way they will calculate pre-disability income. Some policies currently allow you to take the highest 12 months of income out of the previous 3 years. Moving forward, insurers will only look at the previous 12 months of income and assess from there. There may be some exceptions such as self-employed or people with fluctuating income who may be given special consideration or by averaging the highest income for a particular period across the year. Existing policies are not impacted by this change.
 

Current policies allow you to insure 75% of your gross annual income (although some allow up to 85% depending on the occupation and product). This is called the replacement ratio. Moving forward, this will be capped at 90% of your gross annual income for the first 6 months of your claim and then it will reduce to 70% of your income for the balance of the claim. These are maximum limits and may actually be less on individual products. There may also be changes to things like being allowed to work up to 10 hours without it affecting your claim payable or excessive indexation of benefits. Existing policies are not impacted by this change.

Finally, a change to the definition from ‘own’ occupation (i.e. the job you are currently paid to do) to ‘any’ occupation (this is any job you are reasonably qualified and educated to do). This proposed change means if you are a highly skilled brain surgeon who can no longer perform surgery due to say the amputation of a finger, but you could still work as a GP or consultant then you would be expected to go and do the other role. Existing policies are not impacted by this change.

Why the change?

In short, APRA want to deter longer than necessary Income Protection insurance claims. Each of the above proposed changes is aimed at ensuring a fair and sustainable insurance system for both insurers and the insured.

What next?

Because of these changes that are coming later this year advisor Andrew Edwards believes it is very important that all Entourage clients review their current Income Protection policies and make sure they are provided with the best possible cover. There have been some very good developments in these products more recently and we would like to make sure that you are aware of these, and we make the necessary changes before it is too late.

Time is of the essence here as the changes that APRA are implementing will come around quickly and there is potentially a lot involved if we need to make any changes to the structure of your Income Protection policies or ensure that your Income is in fact insured