Income Protection policies as we know it are changing come 1 October 2021. Now before you switch off and say “boring, no one cares” bear with me because Income Protection is, for many people, an important aspect of their financial plan.
Your income is the best wealth creation tool you have, so it makes sense to protect it. In my opinion, any good financial plan will consider the need for Income Protection as part of the risk mitigation strategy.
The upcoming changes have been mandated by the Australian Prudential Regulation Authority (APRA) and they are the second round of changes coming into effect. The first round was back in April of 2020 when we saw the removal of “agreed” policies as well as a few other tweaks. This next lot of changes is even more substantial.
However, let me point out upfront that if you already have an Income Protection policy in-place or apply for a policy before 1 October, then these changes won’t apply to you. They only apply to policies taken out after 1 October 2021.
In my opinion, the biggest change that is coming is the way that claims are assessed. Under the current system, good Income Protection policies are assessed under an “own occupation” definition throughout the full benefit period. This means you will continue to receive a benefit if you can’t return back to the role you were doing before you went on claim.
From 1 October 2021, new policies will have claims assessed under an “own” occupation definition for the first two years only, then revert to an “any” occupation definition.
Under an “any occupation” definition, you will only be able to remain on claim if the assessor is satisfied that you can’t work in any other occupation which is suitable given your training, education and experience.
This could mean that you are forced to work in a position that you don’t want.
Another big change that is coming is the way that your pre-disability income is calculated. At present, a lot of the better insurers out there will look back over your last 2 or 3 years of income to justify your benefit amount under an indemnity policy. Under the new arrangements, assessors will only look back at the last 12 months.
This means that if your income has dropped in the 12 months leading up to a claim, you may not receive your full benefit payment. This is something that impacts self-employed people and commission-based roles the most and there is talk about averaging this income over a reasonable period but its currently unclear.
In addition, the income replacement ratio is reducing from 75% to 70%. At present, most Income Protection policies cover up to 75% of your pre-disability income and also include ancillary benefits which can result in benefits in excess of 100% of pre-disability income.
If you apply for cover after 1 October 2021, you will be covered for a maximum of 90% of your pre-disability income for the first six months which will then drop to 70% for the remainder of the policy, resulting in a lower ongoing benefit.
That’s really a summary of all the changes coming into effect to new policies from 1 October 2021. There is also the likelihood that from October 2022 policies will no longer be guaranteed renewable after 5 years however, we will cross that bridge when we get to it.
So, if you need an Income Protection policy or you want to review your current policy then I strongly suggest you do it now before these new changes come into effect.