Upcoming Changes to Income Protection Policies
Insurance companies make a fair amount of money on Life insurance. This is because most people will hold life cover until they retire or have cleared their mortgage and then cancel without ever claiming. Longer life expectancies have also factored into this.
However, one type of policy where claims have increased significantly in the past 20 years is income protection. As medical understanding of illnesses regarding mental health has increased claims in this area and the generous wordings of older policies has meant that payouts have lasted longer.
In short, income policies in their current format are unsustainable and the regulator has worked with life companies on the rules surrounding them to ensure there is not a complete collapse of the structure in the future.
New government regulations have been introduced that will reduce the benefits available on new income protection policies written after 1 October 2021, mandated by the Australian Prudential Regulation Authority (APRA).
Those who hold cover via a group insurance scheme – such as bundled insurance in an industry fund or company scheme – will be affected by these changes.
If you currently have a standalone comprehensive policy, or can get one in place by 1 October 2021, you will maintain your existing higher benefits.
From October 2021, however, these extra benefits will not be available on new polices, due to the changes
The changes include:
Income replacement ratios to be reduced to 70%, from 75% currently.
Currently if you earn $100,000 per annum, you can obtain income replacement up to $75,000 per annum. From October the maximum will be $70,000.
Income to be calculated on last 12 months income only, compared to some current policies offering highest 12 months income in the last 2 or 3 years.
When you make a claim on income protection, the insurance company – depending on their own policy rules – will normally take your best 12 consecutive months of earnings over a 2 or 3 year period, when ensuring you can claim the full benefit of your cover.
So, for the client below who averages $100k over three years and makes a claim – they can use their best 12 months earnings from the 2020 year to verify their claim.
Under new rules, the claims will only look back over 12 months – if this were a bad year, (hello lockdowns) and they only earnt $50,000 – the most they could claim is $37,500 per year.
This is a massive kick in the teeth for business owners, or those with bonuses, with variable income and also those returning to work after career breaks or for child care.
Long benefit periods, such as to age 65, to be managed to maintain a motivation to return to work. This may include changing from “Own Occupation” to “Any Occupation” definition after 2 years on claim.
After 5 years, your benefit may be cut if it is determined you can return to the workforce in ‘Any’ suitable role you could be trained for, even if it wasn’t your job pre-injury.
Furthermore, life companies can now reassess your occupation every 5 years. If you’ve changed jobs from being an accountant to being a lion tamer – expect a hefty premium increase.
Action to take
Income Protection is the most valuable of all insurance covers – the loss of a salary can happen quickly and as many as one in four of us will have to take an extended period off work before retirement.
These change will affect existing group and industry super policies, so it is more vital than ever to have your own income protection polices and not rely on your Superfund.
These changes have unsurprisingly not been heavily publicised by the life companies as you can imagine!
Email hello@metricwealth.com or call us on 1300 50 20 30 for a complimentary review of your insurance cover.