We recently communicated the upcoming changes to Income Protection proposed to take effect on 1 October 2021.
One key change which the Australian Prudential Regulatory Authority (APRA) has now delayed to 1 October 2022 is:
Insurers can revise Income Protection policies every five years
Under this change, the guaranteed renewal benefit will no longer apply as the insurer will revise some terms and conditions of your income protection policy every five years.
The insured person will be required to provide a declaration in relation to changes in their occupation, income generated from employment or involvement in any dangerous pastimes.
All other changes will remain relevant from 1 October 2021, these changes are outlined below:
Two-stage coverage levels
At present, most income protection policies cover up to 75% of your pre-disability income and also include ancillary benefits which can result in the claimant receiving benefits in excess of 100% of their pre-disability income.
Should an individual apply for cover after 1 October 2021, they will be covered for a maximum of 90% of their pre-disability income for the first six months which will then drop to 70% for the remainder of the policy, resulting in a lower ongoing benefit.
Earnings ascertained over 12 months rather than up to three years in retrospect
At present, if a claim is made, some policies allow the insurer to look back over the past three years and use the best 12-month period to substantiate the claim.
For applicants from 1 October 2021, the changes will limit this look back to only the last 12 months.
For individuals who have variable income, such as self-employed contractors, their earnings may be averaged over an appropriate period, however the exact handling of this is currently unclear.
Changes to the way claims will be assessed
At present, all income protection claims are assessed under an “own occupation” definition which ensures individuals are protected if they become ill or injured and are deemed unfit to perform their own occupation.
Applications from 1 October 2021 will have claims assessed differently. Claims will be assessed under the “own occupation” definition for the first two years under claim, then the definition will change to an “any” occupation definition based on training, education and experience.
For many this may result in long term income protection claims ceasing after two years.
Whilst the changes from 1 October 2021 will lessen the quality of future income protection, it is unclear if the premiums will be reduced in line with this.
With the above changes impacting the quality of income protection which can be applied for, it is important to consider reviewing existing income protection policies or completing a new application before 1 October 2021.
Should you wish to discuss this in further detail please contact your William Buck Advisor.