Reputable insurance companies in Australia offer some of the most generous Income Protection contracts in the world.
Over the last 5 years, they have also collectively lost around $3.4 billion through the sale of Income Protection (also known as Disability Income Insurance or DII) contracts with individuals, with these losses accelerating over the last year, due to a range of factors, including:
- Competition between insurers which has driven many to continually add features and benefits, whilst keep premiums relatively low
- The very low interest rate environment. Insurers are required by law to maintain money required to pay all claims in a statutory fund. As this fund needs to be liquid, they are restricted in that they cannot invest in long term, higher performing assets e.g. shares or property, and need to invest in highly liquid assets with a low probability of a loss. This has meant much lower returns for insurers than historically.
- Higher rates of claims than ever before
On 2nd December 2019, the government regulator, the Australian Prudential Regulation Authority (APRA), decided they needed to act to ensure Income Protection remains sustainable and available to Australians long term stepped up and have proposed the following changes:
- ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
- avoiding offering DII policies with fixed terms and conditions of more than five years; and
- ensuring effective controls are in place to manage the risks associated with longer benefit periods.
What do the key proposed Income Protection changes mean?
Insurers will be unable to issue new Agreed Value policies from 31 March 2020
If you have a good quality “Agreed Value” income protection policy in place, you likely provided financial information at the time of application – or took advantage of a special offer that waived the requirement for financial information. The insurer then “endorsed” your insured benefit amount, so if you make a claim for not being able to work at all due to illness or injury, no financial information is required.
Conversely, if you have an “indemnity” contract, a claim would be limited to the lesser of: 75% of your income in the 1-2 years prior to claim, or your insured benefit amount.
For many Doctors, this may be no issue, but if you are newly self-employed with your own practice or working as a contractor and still building your patient numbers, or you have been on maternity or unpaid leave, this could mean you would be able to claim far less than what you otherwise could. This could be a big problem if you cannot work for a long time and are relying on this ‘Plan B’ to cover you and your family’s living expenses, extra out-of-pocket medical costs and loan repayments.
In addition to much greater uncertainty for you at claim time, the last thing you want to be doing after a major accident or illness is trying to arrange your last 2 years tax returns before you can start being paid your Income Protection claim.
New Income Protection polices will no longer be “Guaranteed Renewable”
Reputable insurers typically offer a “guaranteed renewable” basis for their insurance contracts for individuals.
This means that the insurer cannot break or change the contract to your detriment for the life of the contract, so long as you keep paying the premium. Furthermore, often they will actually automatically upgrade your insurance definitions in line with any changes to new contract terms they are offering.
This is very different to most types of insurance contracts that are non-guaranteed renewable. This includes:
- Most default insurance offered via your super fund, where the super fund can cancel or downgrade the generosity of the policy at their discretion, or
- Home and contents insurance, where your house floods and next year, they decide they are going to triple your premiums – or decline to renew your policy.
APRA has proposed that Income Protection policies will no longer be available on a “guaranteed renewable” basis and will be subject to a review every 5 years regarding your income, occupation and the generosity of the terms and conditions of your policy.
This is not ideal and means greater uncertainty for you at claim time, as well as every 5 years at renewal time.
So what does this mean for you?
APRA and the insurers are still wading through the details, as this is still just a proposal with a consultation process due to be completed by the end of February 2020. As such, there is no specific clarity yet.
The good news is that it appears likely that the proposed changes will only apply to new Income Protection policies from 31 March 2020.
Thus, if you have quality Income Protection in place on an Agreed Value basis already, this will become much more valuable to you, as it will soon no longer be obtainable.
However, please contact us immediately if:
- Your existing Income Protection policy is not for the maximum you are eligible for based on your current income and/or special offers available – or you are unsure,
- Your Income Protection cover is on an Indemnity basis,
- You have been considering reviewing your amount of cover, or
- You are considering establishing quality Income Protection cover,
as you will need to act now.
This is because the proposed changes will commence as early as 31 March 2020 and the process to make changes or establish new Income Protection cover usually takes at least several weeks.
This is quite a strong message, but we need to emphasise the significance of this as one of the biggest ever changes to Income Protection in Australia which could impact you if you don’t take action.
As always, please note this information is general in nature only and should not be considered as personal advice.