Insight

Changes to income protection insurance

02 February, 2021

Also known as ‘salary continuance insurance’ or ‘disability income insurance’, income protection provides a portion of your income, if you are unable to work due to injury or sickness for a certain period of time.

What is income protection?

Also known as ‘salary continuance insurance’ or ‘disability income insurance’, income protection provides a portion of your income, for example 75% of your annual salary, if you are unable to work due to injury or sickness for a certain period of time. Income protection policies have a waiting period and a payment period. The waiting period is the time you must wait from when you make a valid claim, to the time you become eligible to start receiving payments. The payment period is the period you can be paid so long as you remain unable to work. Other terms and conditions apply depending on the policy, with all of these factors affecting the level of premiums you pay.

Why are changes being made?

Recently, the Australian Prudential Regulation Authority (APRA) announced that it is concerned that life companies have been keeping premiums at unsustainably low levels to compete for customers. APRA expects life companies to review and update their product offering with a focus on long term sustainability, whilst ensuring products continue to meet the needs of consumers.

Have any changes been made?

Yes, effective from 31 March 2020, insurance companies have: * stopped providing ‘agreed value’ policies that are based on the income you advise at the start of cover, regardless of any subsequent change in income. This means no more ‘agreed value’ contracts can be bought or sold after 31 March 2020.

What other changes have APRA announced?

With effect from 1 October 2021, APRA expects that life companies will offer new income protection contracts where:

  • the insured income is to be based on your annual income at the time you make a claim, and are not able to look back more than 12 months
  • a maximum income replacement payment of 90% can be made in the first six months and 70% thereafter, with no limit on the monthly benefit
  • a maximum payment period of five years, with a right to renew cover
  • insurance providers must have adequate risk management processes in place to mitigate the risks associated with long term benefit payment periods

What happens to existing policies?

If you have an existing retail income protection policy which include a ‘Guarantee of Renewability’ in the policy wording, that is, the policy is automatically renewed each year, your policy will continue with no changes.

Are policies which meet APRA’s new expectations available now?

Yes, life companies are starting to develop and release new income protection policies which meet the guidelines set out by APRA. However, the majority of insurers will launch these new policies with new Product Disclosure Statements, from 1 October 2021. In the interim it is best to speak to your financial planner to discuss the options available to you.