Income Protection is changing again!

March 2020 Income Protection had a significant change with the removal of Agreed Value policies, if this wasn’t distressing enough there are more changes due to come into effect in 1 October 2021.

These changes were announced as a part of a series of reforms in 2019 by the financial regulator APRA to ensure the long-term viability of the life insurance sector after it lost about $3.4 billion over 5 years.

The key changes due in October 2021 are:

• Income replacement limits

Benefits paid to a policyholder will no longer be able to exceed 100% of earnings at the time of a claim.

New caps will be introduced to limit the maximum benefit payable to 90% of earnings at the time of a claim for the first 6 months and 70% of earnings ongoing.

• Policy contract terms

Most current policies in the market are automatically renewed on a yearly basis with terms and conditions that do not expire until the policy is terminated or the policyholder reaches retirement age (in most cases age 65).

APRA says that locking in the same terms and conditions for such a prolonged period means that the only way for insurer’s to adapt to changing market circumstances it to increase premiums, which may mean policy pricing becomes unsustainable. Due to this APRA have advised that from 1 October 2021 insurers will not be allowed to offer guaranteed renewable contracts that run for more than 5 years.

Policyholders will be able to enter into a new policy contract after the 5 year period review without a medical review, but the new contract would be based on the terms and conditions that the insurer is offering for new business at that time. This means that an insurer will be able to increase your premiums based on changes to your personal circumstances, like income and occupation.

• How income at the time of a claim’’ is defined

This change would mean insurers must calculate benefit payments where a policy holder has a predominantly stable income the amount of income insured (“income at risk”) must be based on annual earnings at the time the claim is made, or within the past 12 months.

But if the policy holder has a variable income, insurers will base their ‘income at risk’ on a policyholder’s “average annual earnings over a period of time appropriate for the occupation of the policyholder and reflective of future earnings lost as a result of the disability”.

There will be exceptions allowed when a policyholder has a variable income due to circumstances like unpaid maternity/parental leave.

If you have been thinking about protecting your income it may be best to get on to it sooner rather than later, remember the changes above due 1 October 2021 so act now to secure yourself more favourable terms.

The process of putting Income Protection insurance in place can take time, sometimes weeks or months, depending on your personal circumstances, if you would like to secure cover before 1 October please call Chris Earle our Life Adviser as soon as possible.