In January 2020 we wrote about the significant changes coming to new income protection insurance policies in Australia, with some of these changes due to take effect from 1 October this year, and at least one measure delayed for 12 months. Below is a summary of what is changing and why it’s important you act quickly.
From 1 October 2021, it’s expected insurers will offer income protection policies with the following changes:
- Policies with long term benefit periods (typically to age 65) should have controls in place to limit the ongoing claim, such as having a stricter disability definition for longer benefit periods. This means:
- While there is currently one ‘tier’ of definitions you need to meet in order to claim on an income protection policy, if you are unable to perform your normal job, under the new changes an additional ‘tier’ will need to be met in order to remain on claim for a longer time frame. This means people could be forced back into finding work if they do not meet the prescribed disability criteria.
- It’s likely this will result in an assessment against your ability to perform your ‘own occupation’ in the first two years of being on claim, in addition to being assessed against being unable to perform ‘any occupation’ in order to remain on claim after two years.
- The insured income will be based on the income earned in the 12 months prior to the claim rather than the ‘best 12 months over the previous 36 months’. This means that you may be paid a lower amount if your income was less in the year you claim on your policy.
The following measure was delayed, and will now apply to policies starting from 1 October 2022:
- Policies will no longer be ‘guaranteed renewable’. As a result, every five years the insurer will revise the terms and conditions of a policy and re-assess the insured’s income and occupation position. This compares to current policies, which lock the insurer in to the terms and conditions from policy commencement and can’t be made worse, only improved for the benefit of the insured. This means:
- If you changed occupation to something ‘riskier’, or were earning less (or perhaps not working at all at the time) and the policy was reviewed at this five-year interval, you could find the cost of the cover increasing or no longer being offered at the same level of cover.
- Of particular concern, at the five-year interval should the insurer remain unprofitable, the insurer may also be able to change the terms and conditions required to be met to make a claim, making it harder to successfully claim.
Despite the quality of income protection policies declining, initial observations from insurers who have moved early on these changes indicate no material decline in the premiums when compared to the current income protection policies on offer.
If you don’t already have income protection cover in place, below are additional important considerations:
- Your greatest asset in life isn’t your house or superannuation, but your ability to earn an income – over a working lifetime of 40 years, an Australian earning the median wage will earn around $3,000,000 in their lifetime. You insure your home, why not your income?
- Income protection cover is tax-deductible, effectively discounting your premiums by 19% to 47% depending on your level of income.
- Income protection policies can offer other benefits, for example, upfront payments if you break certain bones or upfront payments if you are diagnosed with a major disease or cancer.
- Income protection cover offered by your superannuation fund may be of low quality and not priced very competitively compared to more comprehensive policies outside of superannuation.
If you have not organised income protection cover for yourself already, now is a great time to do it, before these changes are introduced.
If you do have some cover, but you haven’t reviewed it in a while, or perhaps you only have cover held in your super fund, speak to a BDO Private Wealth Adviser to review appropriate cover options.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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