Income Protection Insurance has been available in Australia for over 30 years. It’s a product designed to pay you a monthly benefit to help you cope financially when your income has stopped temporarily due to an accident or illness, causing you to be unable to work. Many Australians have Income Protection Insurance directly through an insurer or through their superannuation fund.
You may have noticed an increase in the cost of your insurance cover when looking at your latest superannuation statement or insurance renewal notice.
In addition to increasing insurance premiums, there are also a number of major changes being introduced to income protection products.
Why are insurance premiums increasing?
Over time, the range of benefits and features offered through Income Protection Insurance has grown. Many policies now offer several different waiting and benefit period options, with some offering to pay more % of your income as a benefit. These extras are expensive for insurers when they need to make a payout. Unfortunately, this has placed a growing financial strain on the industry.
Insurers are seeing an increase in both the number of claims they are receiving and the duration, which is significantly increasing their costs.
As part of the Financial Services Royal Commission, the insurance industry was required to review their individual policies and premiums, which resulted in the following findings:
- Almost all insurers recorded significant losses on their income protection products in each of the past 5 years
- Insurers use profits from their life insurance products to offset losses on their income protection products
- The current low interest rates are putting pressure on insurers who rely on returns from investments to help fund their ongoing costs, including life, TPD, trauma, and income protection claims
What are the changes?
From October 1, 2021, life insurers will offer significantly less generous income protection policies to consumers.
The key changes are:
- The discontinuation of agreed value policies, which came on force from March 31, 2020.
- Insurers ceasing to offer guaranteed renewable policies for the life of the policy, with a maximum contract period being limited to 5 years
- Limitations on the income replacement percentage available, with a maximum income replacement payment being limited to 90% during the first 6 months and 70% thereafter
- Limitations on how ‘income at the time of claim’ is defined, with the insured income based on your annual income at the time you make a claim. Any income earned more than 12 months prior to the date of claim will not be considered.
‘Agreed value’ income protection cover is no longer available
The nature of ‘agreed value’ income protection products has meant that some policyholders could be paid more through income protection than by their employer, reducing the incentive to return to work.
One of APRA’s new requirements is that insurers must cease selling agreed value products, and instead determine benefits to the claimant’s income when they claim.
What does this mean for existing policyholders?
Existing Income Protection policyholders are not impacted by these changes.
New or prospective Income Protection policyholders may want to consider putting income protection in place prior to October 1, 2021 to ensure the policy falls under the current, more generous arrangements.
As a result of the new changes, if you are looking to obtain income protection insurance, it may be worth prioritising this sooner rather than later.
The key benefits include:
- Protection for your most valuable asset – your ability to earn an income
- Income protection cover is tax deductible, which will effectively reduce the total cost of protection
- Where household cashflow is an issue, insurance can be structured to ensure a majority of the cost can be paid via your superannuation
Seek expert advice
If you want to ensure that you and your family will be financially secure if illness or injury strikes, or if you would like to review your existing insurance cover or needs, we can help.
To find out more, call us on (07) 5482 7485 or fill out the contact form and we’ll be in touch.