If reviewing your income protection insurance has long been on your to-do list, time is running out to make the most of it.
For many years now, many income protection policies have come with more bells and whistles than the latest model SUV. But that is all about to change.
APRA (the industry regulator) has expressed concerns about the amount of money insurance companies are losing from income protection claims ($3.4 billion over 5 years, to be exact). To make sure that insurance companies don’t stop offering this type of insurance altogether, APRA has instructed them to make changes to their income protection policies by 1 October 2021.
Here is a quick snapshot of income protection is and the key reasons to take out a policy before the new changes kick in.
What is Income Protection?
Income protection (also known as salary continuance) is a life insurance policy that replaces up to 75% of your income if you are unable to work for a prolonged period due to illness or an accident. Once you have satisfied the waiting period, the policy pays a monthly benefit for as long as you are off work or for the duration of the benefit period specified in your policy.
Why is it important to have Income Protection?
Statistics show that most of us are likely to be off work at some point in our careers. So the question becomes, if you are injured or diagnosed with a serious medical condition and unable to work – how will you continue to pay your bills? As we know, Centrelink payments take time to process (and don’t pay much), so unless you have a generous rich Aunt willing to lend a helping hand, having an income protection policy is your best back up plan.
What are the benefits to taking out a policy now?
#1 Larger claim payments
Income protection policies currently offer the ability to receive up to 75% of your salary until you reach retirement age. The new rules mean that this payment figure is going to be limited to 70% (or less) of your income if you are on a claim for longer than 6 months. While 5 or 10 per cent may not seem like much, this can really start to add up if you are off work for years or even permanently. In addition, career breaks and maternity leave may also reduce your payout. Currently, insurance companies will often look at your last 2-3 years of income and make your payment based on the best 12 month period. That will no longer be the case, which means that if your income has temporarily dropped in the last 12 months your income protection payment will be based on your reduced income, rather than your usual salary.
#2 Easier claims
At the moment most income protection policies will pay your claim providing you are unable to do your job for medical reasons. Policies taken out after October this year will likely have stricter claim rules if you end up receiving a benefit payment for longer than 2 years. In this case it is likely that you will be required to prove you are unable to work in any job in order for your claim to continue past the initial two-to-five year mark.
Some income protection policies offer additional lump sum payments in certain circumstances on top of your salary replacement (for example if you are diagnosed with cancer)– these additional payments will no longer be available.
Typically speaking, providing that you pay your income protection premiums on time, you have the ability to continue to renew that policy indefinitely under the same terms and conditions. This means that if your income changes, you have a career change or take up a risky hobby, the insurance company is unable to amend the terms of your contract. From 1 October that is all about to change. New policies can only be renewed for a maximum 5 years at a time, at which point the insurance company will have the right to amend your cover if they decide to.
TL:DR – What’s the bottom line?
While the new changes to income protection policies are designed to preserve the viability of insurance companies in Australia, they may mean that you will pay more for less cover if you take out income protection insurance after 1 October 2021.
If you are concerned about how these changes will affect your existing cover, or would like to take out insurance before the changes kick in, we recommend getting personal financial advice as soon as possible. Keep in mind that insurance applications can take weeks (sometimes months) – so don’t wait too long to take action.