There have been some changes to Income Protection insurance policies over the last 24 months… here are the highlights.

From 31 March 2020

Agreed Value income protection policies are no longer available.

From 1 October 2021

Insurers will have rules in place to make sure that benefits do not exceed 90% of a policy holders earnings for the first 6 months of the claim, and then do not exceed 70% of earnings after that.

Insurers will also halt offering guaranteed renewable policies and follow stricter disability definitions for longer benefit periods.

Why are the changes happening?

The Australian Prudential Regulation Authority (APRA) want insurers to improve their profitability and sustainability in regard to income protection products. This is due to the heavy and ongoing losses experienced over the past five years, totaling an amount of

$3.4 billion. These changes are being made in order to manage the financial risk associated with the product.

Income Protection Changes Explained

These policies locked in a person’s monthly insurance benefit at the time of the application, these policies are no longer available as at the 31 March 2020.

The alternative is an Indemnity Income Protection Policy, which calculates benefits on annual earnings at the point of claim.

Benefits will be based on the past 12 months of annual earnings.

A Policyholders monthly benefit payment will be calculated on what they earned during the 12 consecutive months before they became sick or injured. This change may impact self employed people who do not have a set secured salary. There is a possible exception that may be made available for some policyholders with fluctuating income. If this change occurs, they will have their income assessed based on the average annual earnings of a period of time that is appropriate for their specific occupation.

Income Protection contracts can’t exceed 5 years.

Any yearly guaranteed renewable contracts will be replaced with contracts that are cannot be guaranteed renewable for greater than five years. It is proposed that the policyholder can elect to renew their contract for further periods (not exceeding 5 years) without having to undergo any medical review, the renewal will be subject to analysis of any changes in occupation and financial circumstances.

Limit on Income Protection payments for the first 6 months.

Insurers must make sure that the benefit does not exceed 90% of the policyholder’s earnings at claim time for the first 6 months. After the 6-month period, the maximum income protection benefit will be limited to 70% of the policyholder’s earnings at claim time – up to $30,000 per month.

Reducing the risk of longer benefit periods

Insurers will have controls in place to reduce the risk of long-term benefit periods. This will effectively mean there will be stricter disability definition as well as internal benchmarks for new income protection products with long benefit periods.

Life Insurance companies to provide quality data

Australian Prudential Regulatory Authority (APRA) expect that life insurance companies will provide up to date data swiftly, so that results of customer experience can be released every 18 months.

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