Significant Income Protection changes

From 1 October 2021 we will see further dramatic changes to income protection policies forced by the Australian Prudential Regulation Authority (APRA), the regulatory body, which is concerned about the affordability of policies moving forward.

The changes are quite considerable when compared to the quality of current policies.  In essence, the regulator has asked all new policies to be stripped back to bare essentials, with a simple waiting and benefit period.

Current policies provide a sum insured to a client either based on an agreed value sum insured or proving your best income year out of the last three at time of a claim.  In many cases, older policies allow clients to claim on the sum insured stated in their policy document, regardless of their actual current income. This has perversely led to many Australians actually being financially better off “on claim” than going back to work.

APRA have provided clear guidance to insurers to change their products. New policies are to provide customers with a sum insured no higher than 90% of pre-disability income for the first 6 months of any claim and then revert to a maximum of 70% thereafter.

Rather than being assessed against your own occupation in the event of a long-term claim, clients will be assessed against “any occupation” they are reasonable trained to do after two years on claim.

APRA are concerned about long-term claims and policies being abused in some cases, which is driving up overall costs for policy holders. There will be further changes again in October 2022, where policy holders will be subject to a renewal process every five years also whereby they must update their duties involved in their occupation and also their current income. Any changes can result in the insurer changing the terms of the cover.

There is no doubt these new policies will be weaker than the current policies individuals hold. However existing policy holders are entitled to keep their existing contracts. Likewise, if you have been thinking about implementing an income protection policy, now is the time to apply before 1 October 2021.