A number of changes are set to be introduced from 1 October 2021 that will impact future income protection policies, and the changes are likely to impact self-employed individuals the most.
What is Income Protection insurance?
An Income protection policy is an insurance policy that pays a proportion (usually 75%) of an individual’s pre-disability income if they become injured or ill and are unable to work for a period of time, whether it be short or long-term.
Why are changes being introduced?
Over the years policy providers have added additional benefits to products, which along with the increasing cost of claims, has meant some products have become unsustainable. The Australian Prudential Regulation Authority (APRA) has mandated changes to support the long-term profitability and sustainability of income insurance.
What happens to existing Income protection policies or policies commenced prior to 1 October 2021?
These policies will be ‘Grandfathered’, meaning the existing more generous terms will remain in place under the policy.
What are the changes to be introduced?
Benefit calculation method: currently new income protection policies are offered on an indemnity basis, meaning you have the choice of looking at your earnings in the prior 12 months, or the 3 years prior to the date of disability. From 1 October 2021, for all new policies the insurers will only look at the prior 12 months of earnings before disability occurred. We see this change impacting self-employed individuals the most as they can experience fluctuating income over time.
Benefit calculation percentage: from 1 October 2021, the maximum benefit you can receive from an income protection policy if on claim will be capped at 90% for the first 6-months, with a maximum of 70% for all subsequent periods.
Contract terms: the majority of current policies available through a financial adviser are guaranteed renewable and once commenced the terms of the contract remain in-force. For policies taken out after 1 October 2021, you’ll need to readvise the insurer of your occupation, income, and pastimes at intervals (likely to be every 5 years). This may result in the income protection policy you hold being adjusted, including your premium, to reflect the changes to your circumstances.
Avenues to claim: current policies offer multiple ways for an individual to claim against their policy. For policies taken out from 1 October 2021, the definitions related to disability may result in these being more restrictive.
We recommend that if you have been considering income protection insurance that you consider contacting one of our Financial Advisers to discuss your options before the 1 October deadline, when the more generous terms for income protection policies will cease. Please call our office on (03) 9584 2277 or email info@vatcpa.com.au to organise a discussion with one of our advisers.