How will I be affected?
While there are number of changes that may have not yet been implemented when it comes to income protection policies, it is not a stretch to say that by October 1st 2021 life insurers in Australia will be offering significantly less generous income protection policies to consumers.
The key changes that APRA has recommended be put into effect include:
The discontinuing of agreed value policies
We touched on it before, but this is one of the biggest changes that APRA has made to the insurance industry.
Previously, income protection policyholders were able to lock away an agreed value of the monthly benefit paid at the signing of the policy. This was extremely beneficial to those who were self-employed or worked as freelancers, as if the policyholders’ income changed down the track they would still receive the agreed amount even though their income may have decreased.
As of the 31st March 2021, the monthly benefit of the insurance policy will be based on the policyholder’s actual income at the time they make a claim, or the best year of earnings in any three years prior for some insurers, as an agreed value is no longer available.
Changing the renewable period to a maximum of 5 years
Prior to APRA’s changes, many income protection policies offered a guaranteed renewal for life. From October 1st 2021, income protection policies can only be held for a maximum of 5 years. After this 5 year period is up, a new policy must be entered into that reflects the current markets terms and conditions.
When a policyholder enters a new contract, medical underwriting won’t be required but any changes to the policyholder’s occupation, financial circumstances and any dangerous occupations or hobbies must be updated and reflected in the new policy. Even if your circumstances are exactly the same after five years, insurers won’t be able to extend your current policy.
Limitations on the income replacement ratio
Following their assessment of the insurance industry as a whole, APRA expressed concern that the current income replacement ratios, in combination with certain product features and benefits, may leave claimants earning more than they would if they returned to full-time work.
In order to curb this side-effect of the current system, and encourage claimants to return to work when they are able, APRA has announced the following changes to policy contract terms which will go into effect on October 1st 2021:
- Benefits will be capped at 90% of earnings at the time of claim for six months and 70% after the 6 month period
- Indexation at the level of CPI is permitted
- Where income at risk excludes superannuation, SGC can be paid in addition to the 90% or 70% cap. If income at risk includes superannuation, the cap applies to income inclusive of SGC super
- There will be no cap on monthly benefits
Redefining how ‘income at the time of claim’ is calculated
For policyholders with fluctuating incomes, such as those who work on a contract basis or are self-employed, the income at the time of claim will be based on your actual earnings, not your agreed earnings as agreed value policies are now prohibited.
For those of you with a stable income, pre-disability income will now be calculated based upon the income at risk at the time of claim or within the last 12 months. For those with variable incomes, income risk will be based on average annual earnings over a period of time appropriate for the occupation of the policyholder and reflective of future earnings lost as a result of the disability.
This flexibility is designed to cover those on maternity or unpaid parental leave who may experience a fluctuation in their earnings.
Requiring stricter disability definitions
Finally, APRA has required that policies with long benefit periods require a stricter definition of disability. From October 1st 2021, a more explicit definition of disability will need to be established as some policyholders may be able to return to employment even though it may not come under the definition of your ‘normal job’.
With this change, APRA aims to reduce the number of claimants who may be able to return to some paid employment but don’t as they continue to qualify for a monthly benefit under their agreed policy. However, there are concerns that some policyholders may be forced to return to work before they are ready due to the stricter disability definitions.