Given the ongoing competition and generous features in some products, the Australian Prudential Regulation Authority (APRA) has decided it’s time for some new rules to ensure income protection cover remains sustainable and affordable for customers.
This will result in sweeping changes to these types of policies from 1 October 2021, so it’s essential to review your insurance protection cover before insurers start altering their product offerings.
Learn more about income protection and other types of personal insurance in our personal insurance and wealth protection fact sheet.
What is income protection?
Income protection cover protects your most valuable asset – your ability to earn an income. It acts as a replacement income if you are unable to work due to sickness, injury or disability and will help support your family and current lifestyle while you recover.
You may not know what life is going to throw at you but one thing you do want to know is that you are covered in case of adversity. Having the right insurance in place will provide you with that peace of mind.
What’s more, your premiums are generally tax-deductible, so they can potentially help reduce your tax bill. Your Adviser can investigate the specifics of your policy to determine what level of deduction you may be able to claim.
“It can seem like a lot of money to pay when it is not needed but then something crazy like this happens and you realise, you’d be crazy not to have it. I think it’s silly for anyone with an income not to have a safety net in place.” – Dwane
Major changes to income protection
Reform of income protection policies started back on 1 April 2020, when insurers were no longer permitted to offer customers Agreed Value income protection policies. Agreed value income protection provided more certainty about the amount you would be paid if you claimed and was based on your best 12 months earnings over a three-year period.
Following this initial change, APRA is implementing further changes from 1 October 2021 that will make new income protection policies much less generous. The reforms mean insurers will be offering new policies that base insurance payments on your annual income at the time you make a claim (or the previous 12 months), not on an agreed earnings amount.ii
For people with a fluctuating income, insurance payments will be based on your average annual earnings over a period appropriate for your occupation and will reflect future earnings lost due to the disability.
To further reduce costs, new policies will no longer offer supplementary benefits like specified injury benefits.
“Our insurance cover gives us tremendous peace of mind for our family into the future if something were to occur. I take comfort in knowing there would be sufficient cover in place, cover I would not otherwise have been able to take up having recently been diagnosed with a heart condition. And it’s all thanks to receiving Steve’s professional and correct advice a number of years ago.” – Craig
Limits on income payments
Other changes include a requirement for the maximum income replacement payment for the first six months to be capped at 90 per cent of earnings, reducing to 70 per cent after six months.ii If your insured income amount excludes superannuation, the Superannuation Guarantee can be paid in addition to the 90 per cent cap.
One of the most significant changes is that the terms and conditions of an existing income protection policy will no longer be guaranteed until age 65. Policies will no longer be offered for longer than five years, so your policy and its terms will be reviewed every five years.
You won’t need to undergo medical review, but any changes to your occupation, financial circumstances or taking up a dangerous pastime will need to be updated in the policy. Even if your circumstances remain the same, you will still be required to review the policy.
If your policy has a long benefit period, you are also likely to face a tighter definition of disability, rather than the previous definition of simply being unable to perform your ‘normal job’. APRA is keen to ensure claimants who are able to return to some form of paid employment do so, rather than remaining at home and receiving payment.
Our Insurance Needs Calculator can help you determine how much income protection cover you might need should you be unable to work due to illness or injuries.
“If I learnt anything from the negatives that we faced, it was the importance of ensuring strong insurance is attached to your superannuation.” – Dennis & Johanna
Impact on existing and new policies
So what does this mean for you?
If you currently have an income protection policy outside your super, you will not be immediately affected by these changes, but it would be wise to check your policy is still appropriate for your circumstances.
Given the extent of the changes to income protection cover, if you have let your insurance lapse or don’t currently have income protection, it could make sense to consider signing up before 1 October, 2021 to take advantage of the more generous current arrangements.
Income protection is often overlooked because of a perception that it’s too costly or not essential, but like all insurance, the cost of not being insured can be far greater. This type of cover offers valuable benefits that should be a key component in your wealth creation – and preservation – strategy.
If you would like help reviewing or selecting appropriate income protection cover, Invest Blue’s Financial Planners can help. Book an Appointment Today.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.