A State of Flux – Current and Upcoming Changes to the Income Protection Market

Updates to Income Protection Policies

As previously touched on in our last insurance article (February 2020), there were some significant earmarked changes coming into effect in the near term to the Income Protection (IP) market. In order to maintain a viable and prosperous market into the future so all Australians could, if they wished, protect their personal exertion income from sickness or injury, APRA announced some sustainability measures to IP contract terms, these changes are outlined below.

Current Measures

Cover Type

  • As of 31 March 2020, you are no longer able to commence Agreed type cover (though you can grandfather Agreed policies that were in place prior to this date, including making cover changes that require underwriting i.e. benefit amount increases).
  • You can now only attain Indemnity type cover (effectively having to prove and provide both medical and financial evidence at claim time). The policy holder will receive the lesser of the outlined benefit amount or what they are able to support based on their current remuneration levels.

Measures From 1 July 2021

Income Replacement Ratios

  • This measure is to ensure policy benefits don’t exceed earnings at claim (this matter can be the effect of some product features including indexation and not having an offset clause allowing the life insured to continue to earn employment income without impacting their IP benefit received).
  • Measures to be implemented by life companies;
    • Insurance benefits to not exceed 100 per cent of earnings at time of claim for the first 6 months, taking account of all benefits paid under the IP product as well as other sources of earned income; and
    • After the initial 6 months, insurance benefits are limited to 75 per cent of earning at time of claim.

Policy Contract Term

  • This is to ensure the terms of an IP contact are not set for an extended period of time (typically till retirement age)
  • Measures (expected) to be implemented by life companies;
    • The initial contract is for a term not exceeding 5 years; and
    • There is a right for the policy owner to elect to renew the contact for further periods (not exceeding 5 years) without a medical review on the terms and conditions applicable to the new contract that are then on offer by the life company. Changes to occupation and financial circumstances should be considered on renewal.

Benefit Period

  • Manage and mitigate the risks associated with long dated benefit periods (to age 65 or later) which can have an adverse effect on a claimant’s motivation to return to work.
  • Measures (expected) to be implemented by life companies;
    • Have effective controls in place to manage the risks associated with long benefit periods (e.g. having a stricter disability definition for long benefit periods); and
    • Set internal benchmarks for new IP products with long benefit periods which reflect the risk appetite and effectiveness of the controls.

For further details on the changes, visit the APRA website.

If you would like to review your current Income protection policy or discuss attaining cover (Income protection or lump sum), please contact one of our Financial Specialists or contact our office on (03) 9835 8200 for a complementary initial consultation.

DISCLAIMER: Information not Expert Advice and Subject to Change

The content of this blog is intended only to provide a summary and general overview on matters of interest and does not constitute expert advice nor intended to be a substitute for expert advice. The content of this blog may include technical inaccuracies and the information may change from time to time without any notice. We attempt to ensure that the content is current and note that it’s based on available information as at 26th April 2020.

About the Author
James Grindrod - Financial Advisor
James Grindrod , Melbourne
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