On 01 April 2020, the Australian Prudential Regulation Authority (APRA) began making changes to the Income Protection (IP) insurance landscape, with Agreed Value policies no longer available as new policies. Further changes will come into effect from 01 October 2021, significantly altering the features and benefits of Income Protection policies.
What is income protection insurance?
An income protection insurance policy typically pays a monthly benefit of up to 75% of your regular income when you’re unable to work for longer than your waiting period, due to an illness or accident.
A suitable income protection policy provides protection for what is often an individual’s largest asset – their ability to continue to earn an income whilst unable – due to illness or injury.
This valuable benefit can help you maintain your lifestyle and support your family while you focus on recovery.
KEY Changes to income protection insurance
From 01 October 2021, insurers will have rules in place to make sure benefits do not exceed 90% of your earnings for the first six months of the claim and do not exceed 70% of earnings after that. Insurers will also cease offering guaranteed renewable policies, and may have stricter disability definitions for longer benefit periods.
These changes are designed to support the sustainability of life insurance in general for the future.
(After 31 March 2020, new applications for Agreed Value income protection insurance were discontinued, which is particularly worrisome for self-employed people who have fluctuating incomes.)
Why are income protection rules changing?
APRA wants insurers to improve the profitability and sustainability of income protection products, as a result of the heavy and ongoing losses experienced over the past five years – $3.4 billion. The changes are a means of managing the financial risk associated with the IP product.
Should a life insurance company fail to demonstrate sufficient and sustainable progress, APRA will impose a capital charge with the amount proportioned to each company’s gross exposure to income protection policies.
How will the income protection rules change?
No more Agreed Value and Endorsed Agreed Value income protection policies after 31 March 2020.
Agreed Value and Endorsed Agreed income protection insurance, that locked-in your monthly insurance benefit at application time, are no longer available to new applications after 31 March 2020.
However the alternative is an Indemnity income protection policy, which calculates your benefits on annual earnings at claim time and can thus be affected by any subsequent reductions in your income.
Less flexible terms for indemnity income protection from 01 October 2021.
From 01 October 2021, your monthly benefit payout will be calculated on what you earned during the 12 consecutive months before you got sick or injured. This change could have a significant negative effect at claim assessment time, especially for the self-employed who do not have the security of a set salary.
Currently, select insurers provide you with the option of proving your income over the previous 2 to 3 years and then using the best 12 consecutive months of that period. There is however an exception being made for people with a variable income who will have the income at risk assessed based on the average annual earnings of a period that is appropriate for that specific occupation. However we are yet to see how this will interpreted by insurers and implemented in their policy terms and conditions.
No more guaranteed renewable contracts from 01 October 2022.
Another income protection change to come into effect no later than 01 October 2022*, is that yearly guaranteed renewable will be replaced with contracts that cannot be guaranteed renewable for greater than 5 years.
While it proposes that the policy owner can elect to renew their contract for further periods (not exceeding 5 years) without having to undergo a medical review, the renewal will be subject to an analysis of changes in your occupation and financial circumstances.
*The implementation of the policy term contract measure was postponed to 01 October 2022 by the regulator, after industry feedback indicated it couldn’t be delivered by the October 2021 timeline.
A six month maximum benefit Cap.
From 01 October 2021, insurers must ensure your benefit does not exceed 90% of your earnings at claim time for the first six months. Life insurance companies will consider your benefit payment and any alternative sources of income you might be receiving. After six months your maximum income protection benefit will be limited to 70% of your earnings at the time of claim, up to $30,000 per month.
Stricter disability definitions.
To encourage clients to recover and return to work sooner, insurers should have controls in place, by 01 October 2021, to reduce the risk of long-term benefit periods. This means stricter disability definitions and setting internal benchmarks for new income protection products with long benefit periods.
Companies to provide up-to-date industry data.
From 01 October 2021, APRA expects life insurance companies to deliver up-to-date data promptly, so results of customers experience can be released every 18 months.
For more information about the IP changes that came into effect on 01 April 2020, you can read our related blog article.
One last thing
If you don’t yet have an Income Protection policy and want to avoid these latest rule changes, you might want to apply for cover as soon as possible. We can help you compare policies from some of Australia’s major brands to find a policy that best matches your needs and circumstances.