Thinking about taking out income protection? Now is the time to act
By 1st October 2021, all major life insurance insurers must stop offering their current range of income protection policies and start issuing policies which comply with APRA’s Sustainability Measures.
Existing income protection policies and their benefits will be preserved, so it is important to get your cover in place before the changes hit.
What are the proposed changes to income protection policies?
In March 2020, APRA forced insurers to cease issuing Agreed Value policies and signalled further changes were coming.
In September 2020, APRA outlined the changes it wanted to see in place before 1st October 2021:
- Income replacement ratios to be reduced to 70%, from 75% currently.
- Other benefits in the first six months of a claim to be restricted to an additional 20%, i.e. a limit of 90% overall. This compares to the current range of benefits which can be double this.
- Income to be calculated over the 12 months before the claim, compared to some current policies which use the highest 12 months income in the last 2 or 3 years to smooth out fluctuating income
- 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.
- Policies to be guaranteed renewable for no longer than 5 years, compared to current policies with terms of up to age 65 or 70.
APRA has since backtracked on the timing of the last measure i.e. the changing of the policy contract term to 5 years. On 12th May 2021 APRA announced that they would give insurers another 12 months to implement this measure. Insurers had reportedly been unable to work out solutions to satisfy APRA’s measures without “unintended adverse consequences for consumers”. However, APRA has reaffirmed its commitment to move away from the current practice of locking in terms and conditions for extended periods of time.
Life insurance companies are still pushing ahead with the other measures. Some insurers have already indicated that they intend to go further than the proposed APRA changes by reducing income replacement ratios to 60% or even lower. Other parties such as the Actuaries Institute have proposed a range of even more restrictive measures.
The new products are expected to be introduced in the months leading up to the October deadline.
Although the details are not yet known, it is clear that the effect of these changes will be to water down the benefits offered by income protection policies in the future.
What actions can you take ahead of the changes?
If you already have an income protection policy:
No immediate action is required. You will be able to maintain your policy in its current form. However, it will be much harder to switch policies in the future without a significant loss of benefits.
If you are considering switching between indemnity policies, then it would be advantageous to do this before 1st October. This is because the definitions of indemnity income and the range of ancillary benefits available now will be more generous than those after the change.
If you don’t have an income protection policy:
Until October you can still take out an income protection policy which has a 75% income replacement ratio, an indemnity definition with a 2 or 3 year lookback period and many ancillary benefits.
Our online comparator allows you to Compare Income Protection Quotes from 10 insurers. If you are not sure if you need income protection, you can complete our online Fact Find at Get Advice and one of our advisers will contact you to discuss your situation.
What will the Income Protection changes mean for the future?
With weaker protection being provided by income protection policies, there will be a greater need to have a comprehensive insurance package in place for the following reasons:
- Increased reliance on trauma insurance to top up income protection payments in the early stages of an illness or injury
Many existing income protection policies have Specified Injuries, Hospitalisation/Nursing care and Critical Illness benefits which are paid out in the first few months of a claim, sometimes even within the waiting period. These extra payments assist at times when medical costs can be at their highest. The likely removal of these “bells and whistles” from income protection policies means there will be an increased need for trauma insurance.
The lump sum provided by trauma cover can be used as a booster amount to cover medical expenses, to replace income during waiting periods and also to provide the funds for a partner to stop work to be a carer.
According to the FSC, cancer accounted for 58% of all income protection claims, which means that trauma policies can effectively supplement lower income protection payments.
- Increased reliance on TPD to provide a top-up income stream in the later stages of a claim
There has always been a certain degree of crossover between TPD insurance and income protection. If you suffer a permanent disability, you can potentially receive a lump sum TPD payout as well as payments from an income protection policy.
With the percentage of income covered by income protection falling, a greater burden will fall on TPD cover. Larger TPD lump sums will be required to top up income so that living standards for families can be maintained.
Unfortunately, TPD policies are not tax deductible like income protection, so this is likely to mean that more TPD cover will be taken out within super, with the associated weaker definitions and tax implications.
- Less switching opportunities for income protection policies in the future
Due to the gap in features and benefits between existing policies and the proposed policies, there are likely to be fewer opportunities to switch policies without a loss of benefits in the future. Existing policyholders are therefore more likely to hold their current policies for longer.
It remains to be seen if the new policies will be priced at a significant enough discount to entice customers who are price sensitive to switch to the new policies with less benefits.
The outlook for Income Protection
APRA has described its changes as being “in the interest of both life companies and policyholders”. However with the life insurance industry struggling to make new sales, it remains to be seen whether downgrading income protection policies at this time will lead to further reduced sales. If so, this may further compound the profitability woes of insurance companies, and make APRA’s goal of making the industry more “sustainable” even harder to achieve.Compare Quotes Online Now >
This article provides general information only. Before considering taking out an income protection policy or switching policies you should read the insurer’s Product Disclosure Statement and seek advice on your personal situation to determine whether this is appropriate for your goals, needs and financial situation. Complete our online Fact Find at Get Advice to have a qualified Insurance Watch adviser contact you to discuss your options.