Important Changes to Temporary Disability Insurance Policies in Australia – Income Protection
What is Income Protection (IP) insurance? IP is an insurance policy that typically pays a monthly benefit of up to 75% of your regular pre-tax employment income/salary when you’re unable to work due to an illness or accident but you are not permanently disabled. This benefit can help you maintain your lifestyle, pay your bills and support your family while you focus on recovery.
Why are these changes being made?
In late 2019, the Australian Prudential Regulation Authority (APRA), the regulator for life insurers in Australia, announced an intervention into the life insurance and income protection industry to ensure ongoing sustainability.
These measures will mainly affect new policies and those taking out increased levels of cover. However, it has also resulted in most insurers increasing their pricing on existing policies that have long benefit periods.
What are the changes?
There is a staged approach – changes already in place:
“Agreed Value” sum insured will not be available for new policies. Agreed Value refers to locking in the monthly insurance benefit based on your pre-tax employment income (wages, salary or self-employment) when the policy was established rather than at time of claim. This means if you have a drop in income prior to claim, the insurer is obliged to pay you the agreed sum insured. New policies will be subject to assessment of your income at time of claim (called Indemnity Value) and is the same way IP insurance held in superannuation is treated. If your income has dropped, you can only receive 75% of your pre-tax income or sum insured, whichever is lower. This is especially relevant for self-employed individuals whose annual income may fluctuate.
Changes to be implemented by 1 October 2021:
Benefits based on your annual earnings of the last 12 months – Your monthly benefit payout will be calculated on what you earned during the 12 consecutive months before you got sick or injured. This change could have a significant negative effect on the self-employed who do not have the security of a set salary. Currently, select insurers provide you with the option of proving your income over the previous 2 to 3 years and then using the best 12-consecutive months of that period. There is however an exception being made for people with a variable income who will have the income at risk assessed based on the average annual earnings of a period that is appropriate for that specific occupation. However we are yet to see how this will be interpreted by insurers and implemented in their policy terms and conditions.
Limit to benefits paid – New IP contracts will be designed so that insurance benefits do not exceed 90% of annual earnings at the time of the claim for the first six months of the claim, taking account of all benefits paid under the IP policy as well as other sources of earned income, and do not exceed 70% of earnings thereafter.
Maximum benefit payable – The maximum you will be able to insure will be restricted to $30,000 a month ($360,000 a year) and cannot be more than 70% of your earned income (including superannuation) at time of claim. Benefits related to super contributions should be paid into the super fund, not to the claimant.
Definition of disability – Long-term benefit policies will have certain measures in place to control the length of ongoing claims and encourage claimants to return to work. This includes a stricter disability definition for prolonged benefit periods. The changes will implement a new tier of definitions for individuals to meet.
Changes to be implemented by 1 October 2022:
IP contracts cannot exceed 5 years. This one is a doozy! Insurers will revise the terms and conditions of policies every five years and re-assessment of the policy holder’s occupation, financial circumstances and dangerous past-times will take place. At this stage, a medical review is not required. This means if you change to a higher-risk occupation or past-time, you will be required to advise your insurer for IP policies, which will result in a premium increase or your policy can be cancelled. Note: Current policies and those implemented before 1 October 2022 are “Guaranteed Renewable” for the life of the policy, usually to age 65, and cannot be altered by the insurer regardless of changes to your occupation, income, past-times or health.