Income Protection – what you need to know

The Australian Prudential Regulation Authority (APRA), the organisation in charge of regulating life insurance companies dropped a bombshell on the Life Insurance industry in December last year. APRA wrote to insurers outlining new measures they are imposing to protect the life insurance industry. Insurance companies will be required to structure their Income Protection products according to these measures.

What is Income Protection Insurance, and how does it currently work?

  • Income Protection provides an ongoing monthly income in the event you are sick or injured and are unable to return to work for an extended period.
  • An individual can usually insure 75% of their gross income (this includes the 9.5% Superannuation Guarantee)
  • Waiting Period – The number of days you need to be off work due to injury or illness before you can receive payments. You can select a waiting period of 14, 30, 60 or 90 days, or even as long as one or two years. The longer the waiting period, the cheaper the policy.
  • Benefit Period – This is the amount of time where you will receive your insurance payments. This ranges from one or two years to age 55, 65 or 70.
  • Policies can be agreed value, where the monthly benefit is based on income declared when the consumer first applies for cover. Agreed value can also be “endorsed” by providing the insurer proof of your income via your tax returns or payslips.
  • With indemnity value, your cover is calculated on your income at the time you make a claim. This means if your income has fallen in the 12 months period before a claim, you get less.
  • Contracts are generally guaranteed renewable. This means as long as you pay your premium the insurer can’t reassess you for changes in health or occupation for the life of the policy.

What are the changes APRA is implementing?

  • From 31 March 2020, APRA expects insurers to stop selling Agreed Value policies, only Indemnity policies will be available. This means you will be paid what your income was in the period immediately prior to a claim. If your earnings have fallen in the period you claim, you will get less.
  • From 1 July 2021 APRA expects life insurance companies to cease offering contracts with fixed terms and conditions exceeding five years. This means after five years the insurer can potentially change the terms and design of a contract. Essentially you are only guaranteed your insurance policy terms are renewable for a five-year period.
  • APRA is also looking at reducing the level or percentage of income that consumers can replace with income insurance, so there is an incentive to return to work.
  • Stricter definition of disability where the benefit period for income protection is longer.

Why has APRA stepped in?

  • Simply put, the major insurers have been losing money on Income Protection insurance and the regulator sees the situation as a risk to the sustainability of the industry . APRA noted that life companies have collectively lost a whopping $3.4 billion over the past five years through the sale income protection to individuals.
  • They want insurers to design income protection policies to be more sustainable and less generous. They say this will also avoid situations where customers receive frequent and significant increases to the premiums they pay.

What does this mean for consumers?

  • It means that any NEW policies after these changes could be inherently inferior.
  • The cost of income protection is likely going to go up.
  • Existing policies will be grandfathered so if you don’t have income protection, now is the time to act before the regulator closes the window on policies that are so generous insurers are losing billions.