There is a major change coming to the insurance landscape in Australia.
The upcoming changes will severely reduce the terms, features and likely benefits available on new income protection policies purchased after 31 March 2020. So if you, or someone you know, earn an income and has been considering Income Protection insurance, there is now a very short window of opportunity to speak to someone and consider the merits of this type of cover.
Overview of Income Protection
Most people need to earn an income to fund their living costs and keep their future financial plans on track. You can currently insure your ability to earn an income by taking out disability income insurance, also known as an income protection policy, so if you fall ill or have an accident and are unable to work, then a portion of your income can continue to be paid to you.
Generally, if you are unable to work, then income protection payments start being paid to you after an agreed waiting period and will continue to be paid until you are able to return to work. If you are never able to return to work, then your payments will continue until your reach the agreed benefit period you nominated when the policy was originally purchased (which can be up to 65 years of age).
For a person holding such insurance, who may have many working years ahead of them, the possible financial benefit in having their income replaced over a longer time frame is massive. For example, a 45 year old, earning $150,000 a year – with a 2.50% yearly pay increase, would have earned a total income of $3,831,699 over a 20 year period. Current income protection polices offer you the ability to insure up to 75% of your current salary, payable for various time periods, right up to age 65.
The Australian Prudential Regulation Authority (APRA) have announced that insurance companies must stop selling “agreed value” polices as at the 31st March 2020. The agreed value terminology refers to the ability to lock in a sum insured based on your existing income at the time of your application, not your income at the time of actually claiming. This feature can be particularly relevant for those who are self-employed or those with fluctuating income levels.
Other proposed changes flagged by APRA to begin by 1 July 2021 include allowing the insurance company to amend your income protection policy’s terms and conditions every 5 years. This is in stark contrast to what current policies usually offer, which is a guarantee to the policy owner that the insurance company is locked into honouring the terms and conditions of your policy as they were offered to you at the time of application (known as a guaranteed renewable feature). The detrimental impact this change may have on policy holders is significant, any scaling back of policy features or terms is more likely to be of benefit to the various insurance companies than the insured person.
At this stage APRA will be consulting with the insurance industry regarding these changes, so there may be variations to what APRA has proposed. We have already received notification from one of our preferred insurers that they are about to cease offering agreed value policies as at 31 March 2020 (about 6 weeks time), and we expect more notifications will be arriving.
Please free to forward this post to anyone you feel may want to hear about these changes.
To see more details on the APRA announcement see link below https://www.apra.gov.au/news-and-publications/apra-intervenes-to-improve-sustainability-of-individual-disability-income
Please note that the content of this communication should be treated as general advice given it does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.