Major Changes to Income Protection Policies in Australia


APRA announce major changes to the structure of Income Protection policies

It’s rare that we communicate with our clients regarding any type of product, let alone personal insurance. 

Yet, this change is significant. 

It will occur in a matter of weeks and is not receiving any publicity in the mainstream media so we felt this update was important so that you can make an informed decision.

Here’s a brief 5-point guide as to what you need to know…

  1. What is Income Protection?

Income protection is an insurance policy that protects your most valuable asset when you are working – ie. the ability to earn income.  

It can cover the majority of your income for a determined period of time if you’re unable to go to work due to illness, sickness, accident or injury.

Personally, I’m very supportive of ownership of this type of policy as it’s generally 100% tax deductible, ensures your family’s lifestyle is maintained, but most significantly, I have witnessed the financial and psychological benefits it provides to those that have made a claim.

Without question, it can make a profound difference if the time ever comes to make a claim.

2. What are the Changes?

On Monday this week, the Australian Prudential Regulatory Authority (APRA) unexpectedly announced that they are mandating a number of changes, 3 of which we believe are

  • “Agreed Value” benefit cover will cease

An agreed value benefit amount is where you confirm your ‘income’ at the time of commencing the policy and it’s locked in – generally for the life of the policy. 

It’s an important feature of income cover, particularly if you have income that goes up and down which is common for self-employed contractors, tradies, business owners, etc.

All future policies are therefore likely to be an indemnity type contract, meaning that you will prove income at the time of claim (not when you apply for the cover).   

If you are an employee with regular, constant income this is generally not an issue. 

If income is variable however, the risk arises that at the time of claim you may have had a poor year of income and unfortunately, the benefits payable will reflect this.

  • New policies are unlikely to continue offering guaranteed benefits to age 65

Wherever possible, we have endeavoured to have income protection policies pay you until the age of 65.  It gives the comfort that money will be received until the time of returning to work, or until reaching pension age – whichever happens first. 

We are awaiting clarity from APRA on the mechanics of the new policy benefit periods, however they have indicated that there will be initial guarantees for 5 year maximum terms with potential extension of the benefit periods after that by the policy owner.  

  • 75% of income will be the maximum benefit amount payable based upon the preceding 12 months of income received and with a new limit applied.

Currently, policy owners may choose to add-in benefits such as superannuation contributions, car allowances etc that may boost the sum insured to a level higher than the typical 75% benefit amount. 

This will cease for new contracts issued and a maximum of 75% of the income received in the preceeding 12 months is expected to be the new standard benefit amount.

3. When will the changes occur?

The first changes commence 31st March 2020. 

4. Why is this happening?

APRA has communicated in the past to insurance companies that whilst their life insurance ‘pool’ of policies is profitable, the income insurance product is loss-making and causes a financial risk to the viability of the personal insurance industry in Australia.

Losses for insurance companies with income protection claims have amounted to more than $3 billion in recent years, and in 2019 alone, is suffering losses above $1 billion by September (APRA life insurance statistics Sept, 2019)

APRA have now communicated these changes will occur and put simply, appear to have lost patience with the insurance companies making changes to the Income Protection policies.

5. What Now?

These changes are surprising and fast.   

Whilst nobody likes to think about insurance over the holiday period, I’d really like you to double check the details of your income protection policy (or chat to loved ones that may hold one).

The three key items for you to check:-

  • Policy type – if self-employed or you have volatile income, then having an Agreed Value type available today is an opportunity to lock in. 

    Agreed Value contracts in policies will soon cease to exist.  
  • Benefit period – Typically we aim for our clients to have benefits to age 65 as its cost effective and gives peace of mind. 

If your policy is less, then let us know to see if we can help before this benefit offer ceases in the marketplace.

  • Benefit amount – Current policies have ancillary benefits that not only cover 75% of your salary but can also include super contributions and more. 

    At a minimum, double check your income is matching at least 75% of your amount insured.

For our clients that already have income protection, we will be endeavouring to call you directly in coming weeks to check that your current income protection policy is appropriate using today’s framework.

In the meantime, if you or your family members have questions, please call our office on 1300-78-55-77 and we’d be happy to explain what’s happening and what options are available.