You may have heard that there are some changes happening to income protection policies – there is one change from 1 April that only affects new policies but there are further changes to come.
Over the past five years through the sale of Income Protection policies to individuals, Life companies have lost around $3.4 billion. The Australian Prudential Regulation Authority (APRA) addressed this issue in the beginning of 2019 and on 2 December launched an intervention proposing a series of measures requiring insurers to address policy design and pricing to improve the sustainability of the income protection market. The first initiative is to stop offering agreed value policies.
As background, there are two main types of Income Protection policies – Agreed Value & Indemnity:
- Agreed Value income protection policies guarantee payment of the sum insured regardless of the life insured’s income at the time of claim
- Indemnity Policies don’t require proof at the time of purchase, however, do require proof of income in the event of a claim
It is expected that no applications for new customers for Agreed Value policies will be accepted by insurers after 31st March 2020 and all new policies will need to be of an “indemnity type”. Therefore, at the time of the claim an insurer will ask for proof of income for the prior 12 months, which may ultimately pay you less than your sum insured.
This new change will have the biggest impact on variable income earners that like the security of a guaranteed monthly payment in the event they are sick or injured. Typically, this would affect self employed persons as well as people with who have recently been out of the workforce, such as being on maternity leave or unemployed.
It is expected that the above is the only change from 1 April, but there will be more changes to come into effect next year:
- Policies will no longer be “guaranteed renewable”, which lock the insurer into the terms and conditions from policy commencement. The proposal is that every five years the insurer can revise the terms and conditions of a policy and re-assess the insured’s income and occupation position. This can mean:
– If you changed occupation to something ‘riskier’ or were earning less (or perhaps not working at all at the time) and the policy was reviewed at this five-year interval, you could find the cost of the cover increasing or the insurer no longer offering you the same level of cover.
– Of particular concern, at the five-year interval, the insurer may also decide to change the terms and conditions you need to satisfy make a claim, making it much harder to claim successfully.
- Policies with long term benefit periods (typically “to age 65”) should have controls in place to limit the ongoing claim, such as having a stricter disability definition for longer benefit periods. This means people could be forced into finding work before they are ready, if they do not meet the prescribed disability criteria.
Once again, there is no change to existing policies, and alterations, such as increasing sums insured or transferring out of superannuation, can still be actioned post-1 April.
We will continue to keep you updated on changes as they are implemented by insurers. However we are happy to assess how these changes impact you and your personal circumstances – please have a chat with one of our advisers.