Changes to income protection cover are almost here – are you ready?

In the next few weeks, a change is coming to the way insurers sell income protection, as a result of losses experienced by the industry.

Income protection in Australia is considered one of the best policy conditions in the world and although some people think insurers don’t pay out, they often do, and have arguably been too generous in some of their disbursements. In certain situations, policy holders were better off on claim than returning to work, with no financial incentive to return to the job.

Over the last five years insurers have collectively lost around $3.4 billion through the sale of income protection and its resultant claims. With large losses and higher than ever claim numbers, the change had to come.

For insurance to be more affordable and sustainable, the Australian Prudential Regulation Authority (APRA) announced on 2 December 2019 that insurers will cease selling agreed value policies.

This was brought on by the life insurance industry’s ongoing failure to design, price and manage significant premium increases in excess of what policy holders would have expected at the commencement of their contract.

APRA did not want insurers to pay more than the customer’s income and wanted the insurer to avoid offering policies with fixed terms and conditions of more than five years.

What does this mean for you?

From 1 April 2020, new income protection insurance policies will only offer indemnity cover by insures like MLC Life, Clearview, AIA Australia and TAL.

If you have an existing income protection policy with agreed value, then you will not lose this feature, but you may find you can’t replace the policy with another insurer that has agreed value as an option.

You can, however, reinstate, cancel and replace to change ownership and lower or increase the agreed income cover without losing this feature.

What is agreed value?

Agreed value is just that, an agreed amount on income cover (providing you have evidence of that income at the time you took out the cover), even if years later your wage drops below the agreed amount. This agreed amount ensures you can rely on an amount of cover if you’re unable to work due to sickness.

What about indemnity?

Income protection with indemnity is usually a cheaper premium option, but unlike agreed value, this type of product only pays a monthly benefit amount up to a limit providing you earned that amount at time of claim. Normally an insurer would go by the last 12 months of income you have earned and pay you up to 75%.

For example, if you earn $100,000 p.a. and have indemnity cover for $6,250 p.m. then you have not lost any monthly benefit. But if you only earned $60,000 that year then you would only be paid 75% of $60,000 or $3,750 p.m., which is an effective loss of $2,500 p.m. Over 20 years this could amount to $600,000 of lost benefits.

Other changes

Other changes to policy conditions, such as policy term, may also be required by APRA but these are yet to be quantified and embedded in the insurer’s obligations. Suffice to say there could be additional changes from 1 April 2020 to these types of policies.

What’s next?

For those that have income protection insurance, some will have features that will no longer be offered in the future. This change may cause you to be stuck with a policy instead of allowing you the flexibility of replacing it with a similar product if there was a better insurer premium offer available. Some policy holders with indemnity may also find themselves in a situation where they have cover they can’t fully claim against, because their income is lower than the benefit amount.

If you have an income protection insurance policy with agreed value in place, speak to The Hopkins Group about what this change might mean for you and to discuss your options.