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Changes to Income Protection Insurance Policies

At the end of 2019, the Australian Prudential Regulation Authority (APRA) announced important changes to retail income protection insurance - and some of these changes are expected to take place from 01 April this year.

The changes are designed to stabilise the income protection insurance industry, as a result of significant and ongoing losses for insurers over recent years. 

In summary, the changes include:

From 01 April 2020

APRA expects insurers to discontinue offering Agreed Value Income Protection Policies as new policies. Agreed Value (and endorsed Agreed Value) contracts have shown that individuals can be insured for far more than their present income, discouraging claimants to return to work.

In announcing this change, APRA said it’s “imperative that claim payments should be linked to income at risk at time of claim”.

APRA has stated that income protection claim payments in excess of the income at risk are inconsistent with the principle of indemnity.

IMPORTANT NOTE: Existing agreed value policies will remain unchanged, so there is still the opportunity to secure an agreed value contract for yourself by 31 March 2020.

From 01 July 2021

Benefits will be based upon the insured’s income over the preceding 12 months
The intent is to ensure that the monthly income protection benefit paid is linked to the actual income being earned at time of claim.

Where the individual changes jobs and is earning less at time of claim than at the time of policy application this can discourage claimants from returning to work.

Insurance benefits, and other earned income, will not exceed 100% of the life insured’s income for the first six months of benefit payments.
The intent of this proposal is to encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role. 

By prohibiting individuals from earning more than 100% of their pre-disability income it is intended to encourage individuals to return to work within six months of disability.

Insurance benefits, and other earned income, will not exceed 75% of the life insured’s income for benefit payments that are longer than six months.
The intent of this proposal is to encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role.

By prohibiting individuals from earning more than 75% of their pre-disability income it is intended to reduce the moral hazard and encourage individuals to return to work.

Maximum benefit payment of $30,000 per month.
The intent of this proposal is to encourage those individuals who are in the top 5% of all income earners in Australia to self-insure where the benefit payments are more than $360,000 p.a. (annual income of $480,000 or more).

Policy terms will no longer exceed five years.
This change is designed to ensure the terms and conditions of income protection insurance contracts remain up-to-date with the consumer’s circumstances (ie. limit benefits that are no longer relevant), as well as reflecting current social norms and medical advancements.

After the first five years, the policy may be renewed without medical underwriting, but both income and occupation will need to be reviewed and confirmed.
This proposal is intended to ensure the insurance policy benefits and features are appropriately priced, based upon the risks associated with the individual. 

Individuals rarely have the same job for their entire careers (as was the case when income protection was originally invented), with most people having at least eight different roles throughout their working career.

Longer benefit periods must have more stringent disability definitions.
The intent of this proposal is to encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role. 

By making the disability definition more restrictive after a defined period of time, it is intended to reduce the moral hazard and encourage individuals to return to work.

Let's talk.

If you don't have income protection insurance, now is a great time to arrange cover, before these changes are introduced. If you do have some cover, but you haven’t reviewed it in a while, or perhaps you only have cover held in your superannuation fund, speak with one of our Wealth Design financial advisers to review the best cover for you.

Note that these income protection insurance changes are for stand-alone retail policies, and not for policies through an individual's superannuation. Superannuation income protection policies already have more restrictive policy terms and conditions.

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