Insurance Changes Coming
Your ability to earn income is by far your greatest asset and protecting it, is the cornerstone to wealth creation.
As of October 1st this year, there are real changes coming to insurance which will change the way income protection is handled. This follows a review by APRA into the sustainability of insurers.
The bad news: new policies will not be as generous in their payouts or methodology.
The good news: you have time lock in a better policy before the changes take effect.
Below is a very brief explanation of the 4 main changes coming and how they will affect you. Further detail below that, and of course feel free to call if you’re unsure what you need to do.
Income at Risk
APRA Recommendation: benefit payouts should reflect the income earned at the time of the claim
What this means for you: if your income fluctuates and you’re in the unfortunate position of needing to claim when your income is lower, then your payout will reflect your income at that time.
- Current and pre-October 1st policies have friendlier payout determinations such as looking at the best year of the prior two to three years
Income Replacement Ratio
APRA Recommendation: there should be greater incentive to return to work
What this means for you: maximum payouts to reduce to 70% for the first two years and lower thereafter
- Current and pre-October 1st policies have much greater benefits, some allowing the holder to receive greater than 100% of income
Policy Contract Term
APRA Recommendation: no need to be ‘guaranteed renewable’
What this means for you: policies may be reviewed every 5 years, and new terms struck based on assessment at that time
- Current and pre-October 1st policies are renewed on the same terms yearly so long as premiums are paid, they won’t alter the policy
APRA Recommendation: reduce the benefit period
What this means for you: you may not be insured until age 65 which is the usual period. Further, your ‘own’ occupation payout will likely change, meaning if you are fit to perform ‘any’ occupation, then your payouts will likely cease.
- Current and pre-October 1st policies include ‘own’ occupation for the entire benefit period, and that period is typically to age 65
Substantial Changes to New Income Protection Policies from October 1, 2021
Following an APRA review of the sustainability of Insurers which commenced in December 2019, there has been a number of changes slated for all Income Protection policies which start after October 1, 2021.
If you’re not much of a reader, at least do yourself a favour and speak to a financial adviser about getting income protection in place now, as the policies won’t improve and certainly think twice about cancelling or replacing a current policy.
Income at Risk
- APRA stated that the benefit payments should be linked closer to the income you are earning at the time of claim. This is in contrast to the more flexible current definitions of indemnity cover, some looking back at the best year of income of the last 2 or 3 which you’d be covered for.
- If you are self employed or income varies greatly, this may adversely affect you as you may not have earnt as much in the past 12 months, despite paying premiums on higher income and expecting as much at claim time.
Income Replacement Ratio
- APRA is concerned about the potential lack of incentive to return to work as some current policies allow the holder to receive greater than 100% of your income with all the initial bells and whistles.
- This will be limited with policies after October 1, potentially down to 70% for the first 2 years and even lower from thereafter, resulting in an overall lower claimable amount in the long term.
Policy Contract Term
- A major feature of current policies is that they are considered ‘guaranteed renewable’ which means that provided you met your duty of disclosure at the beginning of the policy and continue to pay your premiums, an insurer cannot cancel your policy or increase your premiums due to any new pass times, or changes in career or lifestyle.
- Policies from October 1 may not have this feature and could decrease these terms to 5 year contracts, meaning if something changes to the policy holders situation within that time, at renewal, the terms may not be as good with your policy as the past 5 years. Again, another longer-term detrimental outcome.
- Last but not least, and in my opinion the change which could create the greatest detriment to future policy holders is around the long-term payout nature of income protection.
- People usually have benefit periods to age 60, 65, 67 or 70. Now if you are 35, this is a long time so APRA want the insurers to manage this a lot better in terms of overall payouts. Currently, this is not the case as if you cannot return to work as judged by your insurer you will be paid your claimable benefit in line with inflation.
- From October 1 it seems changes to the way you are assessed longer term may mean the difference of being paid your claim or not past say the first 2 years! Income protection uses an ‘own occupation’ definition which means if you cannot perform your duties in your usual occupation you may be paid a claim.
- Going forward, policies may change to an “Any’ occupation definition after 2 or 5 years which could ultimately mean anything you are reasonably suited to by education, training or experience. This could result in that promising career in medicine being replaced but that of clerical role, cleaning role and a range of other ‘jobs’!
It will always be up to each product provider to design their suite of policies themselves, however they will be forced to take into account the APRA guidelines from October 1. It is almost a certainty that policies put in place after this date will not be as comprehensive as the current ones. This is where a financial adviser comes into play and works with you to get the right outcome, it may well be the right time to get one in place now before the changes.
As always, this was written with all due care but does not constitute personal financial advice. General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Where a specific product has been mentioned, you should always consult the Product Disclosure Statement (PDS) before making any investment decision relating to it.