Current income protection products are generous, and as a result, insurance companies have been consistently losing money. The insurance regulator (APRA) has stepped in to help by creating rules to make the industry more sustainable. Some changes have already been made and others will be starting from 1 October 2021. The good news is that current income protection policies will not be impacted by the changes. However, new policies obtained after the changes come into effect are likely to be of a lower quality due to the reasons outlined below.

Claims assessed differently

Currently, many income protection policies consider your last two to three years of income to identify the highest income year. This determines the level of income protection the insurer will pay at claim. If you’ve taken time off work in the last 12 months to have a baby or travel, for example, you may still receive your full benefit at claim. After 1 October 2021, insurers will only consider the income earned 12 months prior to the claim. This means that if you have not worked for a period of time during the past year, your payout could be significantly less than expected. This can amount to thousands of dollars difference over the life of a claim and unfortunately, is likely to affect business owners and those with fluctuating incomes the most.

Maximum benefit payable to be reduced

Current income protection policies pay you up to 75% of your gross income (inclusive of super) for the life of the claim. We’re expecting the proposed changes to pay 75% of your income for the first six months only.  After six months, the benefit amount payable drops to 60% of your gross income (inclusive of super). If you’re on a long-term claim, this can make a big impact.

Changes to policy contract term*

Currently, an insurer cannot change your policy terms and conditions. This means that if you were to change your occupation from an accounts executive to a chef, for example, your income protection premium will not be affected. After 1 October, the insurer has the ability to reprice your premium and adjust the terms of your policy should your occupation change.

*APRA has extended this change to come into force from 1 October 2022.

More difficult at claim time

Changes to the definition of ‘disability’ are expected. Currently, many income protection policies can payout if you are unable to do your job (own occupation). After 1 October, your income protection policy is likely only payout if you are unable to do any job after the first two years of claim. This could significantly impact your ability to stay on claim long term.

Need more assistance with income protection?

If you are considering income protection, there has never been a more crucial time to get this in place. Insurance applications do take time – so please don’t wait until the last minute to reach out. Get in touch with our expert financial planners to secure your income protection policy.