Income protection has been available in Australia for over 30 years and is designed to pay you a monthly benefit (usually up to 75% of your income) to help you cope financially when your income has stopped temporarily due to an accident or illness.
Over time, the range of benefits and features offered through income protection has grown. Many policies offer several different waiting and benefit period options, with some offering to pay more than the usual 75% of income as a benefit, or even to pay an additional amount into a superannuation fund to cover what an employer would have paid into it if a person were still working.
However, a surge in the number and duration of income protection claims (especially for mental health conditions) led to large losses and an industry-wide sustainability crisis. As a result, the Australian Prudential Regulation Authority (APRA), the regulatory body that is responsible for the life insurance industry, has mandated that the industry change its products to make them more sustainable. While some changes came into effect on the 31 March 2020, there are additional changes scheduled for July 2021.
According to Canstar, from the beginning of July 2021, any new policies would only have a maximum contract period of five years, and if a person wishes to keep the cover in place, they must renew it. To do this, the insurer will take into consideration changes in occupation and financial circumstances (however a medical review is not required) – and this can change the cost and benefits of your policy. Also, contracts will potentially state that claims extending longer than two years will be subject to an ‘any occupation’ clause. Under this clause, the ‘own occupation’ definition will only be applicable for the first three years of a claim and policyholders will no longer be able to claim if they can perform ‘any occupation’. This means that in theory, a person may be unable to claim if they are deemed fit to return to work in a different role (note: we are yet to see the new policy wording from insurers at the time of writing this article).
For people without cover, there is still time to lock in income protection before the changes in July 2021 come into effect, however, it is important to note that obtaining cover usually takes between 6-8 weeks, due to the underwriting process.
For people with existing cover, the choice is likely to come down to either keeping their existing cover which may have a wide range of features and benefits, but increasing premiums, or alternatively switching to lower cost cover, with reduced features and benefits.
Most of us don’t like to think about ‘worst case’ scenarios, but it’s important to have a plan in place in case of temporary or permanent incapacity. We offer comprehensive risk insurance advice – contact us to discuss your requirements.
Sources: Canstar, MoneySmart
