The window is closing to get your income protection insurance sorted!
Income protection insurance pays you a monthly benefit of up to 75% of your income if you are unable to work due to sickness or injury in the short to long term.
The Australian Prudential Regulation Authority (APRA) has been working with insurers on implementing some proposed changes to ensure the sustainability of the industry, with the next tranche of changes due to take effect on new contracts issued after the 1st of July 2021.
However, this means that the quality of income protection contracts available has - and will continue to be – materially damaged or ‘watered down’.
The changes are needed to ensure claims can be paid in the long term given the following grim statistics:
- The industry net loss in the 2019 calendar year was $1.29b, and
- The industry net loss in the March-June quarter of 2020 was $179m
The changes proposed by APRA are designed at restricting the quality of contracts available and reducing ‘windfall’ benefits, over and above the intent of the maximum 75% sum insured.
The first tranche of changes took effect on 1 April 2020, removing the ability to insure for ‘agreed value’ policies, which agreed on a benefit to be paid at the time of claim at the time of policy inception.
The only offering now available is the indemnity structure, which depending on the definition, could only make payment at the time of claim based on your average income over the last 12 months.
The second tranche of upcoming changes in July 2021 will restrict the contract period to a maximum of 5 years, after which you must renew it from a financial perspective.
The implications of this are that whilst a health check is generally not required, any occupational or financial changes would be considered and adjusted at that time.
While the contract remains guaranteed based on your health, the change to non-guaranteed financial aspects raises concerns for those with a fluctuating income, such as the self-employed, for those with potential career changes in mind and those with potential working overseas plans.
Any such changes may create situations where the insurer changes the underlying basis of the policy and, in a worst-case scenario, declines to renew the contract.
If you are not currently covered or would like a review of what you are covered for, please reach out to the team at Cutcher & Neale as soon as possible.