Income Payment Protection Insurance – What is Changing?
In recent times there have been a number of changes to income payment protection insurance policies. This includes the gradual increase of policy premiums, and life insurance companies no longer allowing you to lock in your benefit amount (Agreed Value) based on your income at application. Instead, your benefit amount is assessed at the time of claim. The next change is a big one. In simple terms, insurance companies will be offering you less income protection and charging you more.
What are the new changes to Income Payment Protection Insurance?
Most current policies insure you for 75% of your annual income, As of October 1, 2021, life insurers will only be covering up to 70% of your income at the time of claim (after the first 6 months) (Source: APRA). To determine your level of income, insurance companies will no longer be considering your income over the past 3 years, and instead only review the immediate 12 months prior to your claim.
Currently, income protection policies with an ‘own occupation’ feature hold this status for the duration of the policy. With the new changes, policies will only offer ‘own occupation’ coverage for the first 2 years, before changing to ‘any occupation’. This may potentially result in benefit payments ending after 2 years if you are capable of returning to any job based on your education, experience, and skills. Whereas previously, you may have continued receiving the benefit payment if you are unable to return to the specific job/role you were employed in (own occupation).
Existing policies are automatically renewed every year – assuming you continue to pay the premiums (guaranteed renewal). Under the upcoming changes, policyholders will be required to renew their policy every 5 years (Source: APRA). This may require you to declare any changes to your income, job description (to assess for increased risk) or past times that may have surfaced since your last renewal. There is no guarantee the policy will be extended after the review and you may be required to re-apply for income protection – and yes, that means underwriting and health assessments.
Why all the changes?
Basically, APRA – the regulatory body for insurance agencies – is concerned that current Income Protection policies are actually discouraging people from getting back into the workforce after making a claim, due to their generous benefit terms. APRA is also trying to protect the financial stability of insurance agencies to ensure they are not over-delivering and under-charging for their policy offerings. (Source: APRA).
What does this mean for me?
For existing income protection policyholder, these changes will not impact your policy. If you are thinking of cancelling your current policy, we recommend seeking advice before doing so as you are unlikely to ever again get the level of coverage and benefits you are currently insured for.
For anyone thinking about getting Income Payment Protection Insurance, it could be worth investigating before the changes come into place on October 1, 2021. If Income Protection has been on your mind for a while, get in touch with one of our award-winning financial planners here.