By October 2021, all life insurance offices will cease to offer the current on-sale series of retail income protection products and migrate to offer policies designed to comply with a new series of ‘sustainability measures’ desired by the Australian Prudential Regulation Authority (APRA).
What is income protection insurance?
Income protection insurance pays you a monthly replacement income benefit in the event you cannot work due to sickness, accident or injury. It is subject to a waiting period (typically 30, 60 or 90 days) and a benefit period (2, years, 5 years or to age 65 or 70). Your ability to generate income can be one of your largest assets and whilst we often don’t think twice about insuring our cars and homes, insuring our income can sadly be an afterthought. Premiums are also tax deductible so it’s a timely reminder to review the need for this type of insurance.
Many consumers will have noticed premium increases on existing contracts well above normal inflation in recent years as insurers attempt to back cover sky-rocketing claim costs caused largely by poor mental health and musculoskeletal issues in the community. Life insurers have thus been called upon by APRA to make their contracts more prudentially sound and sustainable following years of billion dollar losses in this segment of the market. The first change required them to cease offering ‘agreed value’ policies in March 2020 and only offer ‘indemnity’ contracts (meaning proof of insurable income is verified at time of claim now rather than pre-agreed at contract inception). The second series of changes in Oct 2021 will see the following also occur:
- The amount of insurable income able to be replaced on claim will drop from 75% to 70%
- Ancillary payout terms in the first 6 months of claim (like specified injury or trauma benefits) will be restricted such that a limit of 90% overall replacement of income benefits will be in play
- Insurable income at claim time will be calculated on the last 12 months of personal exertion income (whereas at present, an insurer can look back up to 3 years to offer the highest replacement ratio up to the insured monthly benefit amount)
- Longer tail benefit periods are likely to be curtailed (e.g. ‘to age 65 or 70’) with the possibility of a test being introduced after 2 years on claim (where one is unable to work in their ‘own occupation’) to ascertain if the insured can return to work in ‘any other occupation’. Retraining and rehabilitation clauses will also assume greater importance to increase motivation to return to work.
- Policies will only be guaranteed renewable for 5 years (however this measure has been delayed a further 12 months to allow insurers time to adjust as this is material change and may require further legislative reform).
All else being equal, consumers should expect that contracts issued after October 2021 will not be as generous as those currently available. A window of opportunity therefore exists to secure what are arguably superior contract terms compared to what will be available thereafter.
What actions can be taken ahead of Oct 2021?
If you have existing good quality agreed value income protection cover, then no action may necessarily be required straight away as those existing contract terms are preserved. However, as insurers seek to increase premiums year on year on those 'grandfathered’ (off-sale) policies with those more generous contract terms, consumers will face cost/benefit dilemmas: do I downgrade quality, save money and lose benefits OR do I retain my contract on superior terms and wear the material increases in premiums for the privilege? We expect legacy agreed value contracts to be hit hardest by the changes so the window between now and October still provides an opportunity for quality indemnity contracts to be taken out. If however you are experiencing 25 / 40 / 50% increases in premiums already which you find unpalatable then it may be worth a review to discuss what subtle changes might be appropriate in your situation.
What about post October 2021?
We think that consumers in general (particularly the self-employed or those with variable incomes) will need to re-appraise their situation and strike a better balance between the types and levels of cover across lump sum and income life risk products. For example, shorter benefit period income protection policies might be coupled with a higher, more robust Trauma or Total Permanent Disability (TPD) sums insured to manage larger longer tail risk exposures. Severity based lump sum contracts which can pay out smaller amounts for less severe health events across a broader range of medical conditions may also have a greater roll to play.
What options exist for advice on this?
Mazars partners with insurance professionals who are experienced in assisting with specialist estate planning, business succession and risk management advisory, to provide a seamless advisory experience for our clients. Please speak to your usual Mazars advisor who can facilitate an introduction to a recommended insurance professional, or alternately contact one of our advisors on the form below or:
Author: Andrew Proudfoot, Personal Risk Professionals (PRP)
General Advice Warning & Disclaimer: this article provides general advice and information only and does not take into account any particular persons needs or objectives. Before purchasing any income protection or life insurance product, you should seek personal advice from a qualified financial adviser to determine what may be appropriate to you and read the Product Disclosure Statement (PDS) associated with that product.
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