At a glance:
- You will know the major changes in disability income protection.
- You can determine if reviewing insurance coverage is beneficial.
It is likely that if you have owned an income protection or salary continuation policy in recent years, your premiums have increased due to life insurers struggling to cover their large losses. Due to losses by these major insurers, the Australian Prudential Regulatory Authority (APRA) has decreased income protection insurance cover and tightened eligibility criteria. Considering the ongoing competition and generous features in some products, APRA decided it was time for some new rules to ensure that income protection remains affordable and sustainable. These policies will be impacted in significant ways, so it’s imperative to review your insurance coverage so that when the changes occur, you’ll be ready to act.
Previously, the allowable level of cover was 75% percent of your income plus 10% for superannuation, for a total of 85% of your income paid at claim time. However, APRA has subsequently reduced the maximum amount to 70% that can be claimed. As per previous conditions, if you are unable to perform one function of your job, you could still claim a payout. The income protection payout could be 85%, and your payout could last up to 65 years. However, as per new conditions, if you can perform some of your job functions, you are not eligible to claim, and your income protection payout is only 70%. Your claim level falls to 60% after two years, and if you are able to return to work after two years, the claim should be terminated.
Inevitably, one of the most significant changes is that the terms and conditions of an existing income protection plan will no longer be guaranteed until the age of 65. As a result, policy benefit periods can be no longer than five years. There will be no medical review required, but changes in your occupation, financial situation, or participation in hazardous activities will need to be updated in your policy. However, even if your circumstances remain unchanged, you will be required to review your policy.
In addition, if your policy has a long benefit period, then you are also likely to face a stricter definition of disability than the earlier definition, which simply stated that you could not perform your ‘normal job’.
An important concern for APRA is to ensure that claimants who are capable of returning to some form of paid employment do so, rather than remaining at home and receiving payment. Also, self-employed individuals are restricted from claiming income support except for what is deemed to be their personal exertion income. As a result, businesses and tradespeople who obtain some of their income from a profit share or dividend from their business would not be able to claim that income if they become ill or injured.
If you currently have an income protection policy outside your superannuation, then you may not be immediately affected by these reforms, but it would be a good idea to ensure your policy is still appropriate for your circumstances. That means it’s time to review your insurance coverage to make sure you have the best coverage available. In the long run, this involves having an understanding of your level of cover, its cost, and what your insurance needs are, as these will change over time.
Many people overlook income protection since they believe it’s too expensive or not essential. However, as with all insurance, the cost of not having it can be much greater. Wealth creation – and wealth preservation – strategies should include the use of this type of cover.
In order to learn more about income protection insurance, its policies, and the changes, or if you have any questions about it, feel free to get in touch with Aspect Underwriting. Aspect is underwritten by Lloyd’s, the world’s specialist insurer and also a general insurer rather than a life insurer.
Mike Wallis
Mike has over 25 years experience, having spent his first seven years working as a Broker at Jardine Lloyd Thomson in Melbourne and in 2002 was transferred to JLT’s Accident and Health Department in London. For four years (2002 – 2005) Mike was a specialist A&H Lloyd’s Broker and during this time developed excellent relationships with the Lloyd’s A&H underwriting fraternity. In 2006 he returned to Australia in a senior broking position with overall responsibility for Placement Strategy, including the implementation of underwriting facilities and the various authorities granted by Lloyd’s. Mike was the underwriter at two specialist Underwriting Agencies prior to founding Aspect Underwriting in 2016.
