By Kirby Jamieson, Personal Risk Manager and Advisor, Walshs
If you could not work for an extended period because you were sick or injured, how would you maintain your current financial needs and future lifestyle?
Income protection insurance replaces a percentage of your income in the event you’re unable to work because of injury, accident or illness.
There are major changes at play for all new income protection policies due to recent regulatory intervention by the Australian Prudential Regulation Authority (APRA).
As a result, if you do not already have comprehensive income protection cover in place, consider acting soon.
APRA originally announced an income protection intervention in December 2019 after earlier concerns about market sustainability communicated to insurers were effectively ignored.
Generous policy terms and increased claims led to rising premiums and losses of $3.4 billion at the time of the original announcement, with a further $1.4 billion lost since then.
As a result, APRA announced a series of measures to address the existing overly generous product features.
The measures included:
- The discontinuation of the availability of agreed value policies (which occurred on March 31, 2020)
- Limiting the way in which ‘income at the time of claim’ is defined
- Limiting the income replacement ratio available
- An expectation the risk associated with long term benefit periods (such as to age 65) is effectively managed and controlled by insurers.
- Ceasing the ability to offer guaranteed renewable policies for the life of the policy
The removal of guaranteed renewability will restrict the contract period to a maximum of five years, after which you must renew the cover with current financials.
While the contract would remain guaranteed based on health, the need to re-apply financially every five years raises concerns for those who are self employed or have fluctuating incomes or have plans to work overseas for a period of time.
APRA has stated that insurers must release the second tranche of the upcoming changes by October 1, 2021.
The implications for insurance advice over the coming months are profound, as some insurers are expected to ‘go early’ with sustainable IP offerings as early as July 2021.
This will mean a period where both the current comprehensive IP product and the newer basic ‘watered down’ product are on offer.
Furthermore, APRA has stated that while this intervention is currently limited to income protection, they expect insurers “also apply the underlying principles to other insurance products, where appropriate”.
If you are not currently covered for income protection or would like a review of what you are currently covered for, please book in for a financial planning review meeting. Contact us at Walshs on 07 3221 5677 or email enquiries@walshs.com.au.
