In the face of increasing losses and concerns of the financial sustainability of insurers, the Australian Prudential Regulation Authority (APRA) has required insurers to commit to several changes to income protection products as of October 1st, 2021.
We understand how critical it is to generate income for current needs and future wealth creation. Therefore, protecting your ability to earn income is of critical importance and is often achieved with Income Protection Insurance.
For those with existing policies or who have applications submitted prior to 1st October (and completed 3 months post this), the existing and more generous terms will continue. This therefore creates an opportunity to review existing or establish new policies ahead of the deadline.
Some of the key changes include:
- Change in disability definition – After two years of payments, the definition of disablement will change and the individual will only continue to receive payment in the event they are not able to work in any occupation to which they able given ‘education, training and experience’. Currently it is your ‘own’ occupation immediately prior to claim which you are assessed on.
- Replacement income ratio – Although income protection contracts typically offer to replace up to 75% of income, the definition of that income and other benefits can see the actual amount paid significantly exceed this level. New requirements now reduce the maximum payment to 90% for the first six month and 70% after that.
- Increased focus on offsets against benefits payable and further defining ‘personal exertion income’. This includes taking more of any unearned income into account when underwriting and paying benefits as well as capping income earned from 40 hours worked only.
- Greater insurer flexibility in determining an individual’s pre-disability income – Insurers will be able to base the payment on only the last 12 months of earnings rather than the typical current approach of considering the highest income over the last 3 years.
One of the biggest changes was deferred until October 2022 which will see policies subject to reassessment after 5 years. Currently for most policies, when you commence it you are subject to an assessment which includes pastimes and financial situation. These changes will allow insurers to alter terms or decline cover after 5 years. This will typically impact self-employed, people who have reasonable amounts of unearned income and from October 2022 people whose non-medical circumstances change after commencing a policy.
What are the next steps?
If you are seeking further information or assistance you can contact your Pitcher Partners expert.