A past, present and future income protection changes
If you’re a medical professional who’s held an income protection policy for some time, you would have no doubt seen your premiums rise in recent years. We have seen insurers continue to record losses on income protection over the last few years which has led their regulator, the Australian Prudential Regulation Authority (APRA), to intervene to ensure the long-term sustainability of the industry.
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Why do income protection premiums keep rising?
Some of the issues that have contributed to the challenges include:
- A highly competitive marketplace
- Generous policy terms and conditions and underwriting
- Increased insurer capital requirements
- Record low interest rates
This has led to substantial increases in claims paid and all of these factors have resulted in significant losses and rate increases. In response, APRA has mandated some of the most significant changes ever seen in the Australian Personal Insurance Industry.
What income protection changes have already been introduced?
The first step in the significant changes was their direction to insurers to remove agreed value income protection policies from sale to new customers as of 1 April 2020.
Policies from 1 April 2020 have been offered on an indemnity only basis which require the policy owner to provide evidence of income to support the insured monthly benefit at the time of a claim. While these polices are more restrictive than the previously available agreed value contracts, proof of income for these policies is generally based on the best 12 consecutive months of income, up to 36 months prior to disability.
Are there more changes coming?
The most significant change that will commence from October this year will see insurers only able to offer new indemnity income protection policies, where the evidence of income is required at the time of claim, which will generally be based on the 12 months immediately prior to disability. There will likely be extensions available to this time frame for periods of unpaid leave (such as parental leave) of up to 12 months.
A look at the changing income protection landscape
Agreed value
- Guaranteed renewable
- Supplementary benefits
- Insurable income percentages maintained throughout a claim
Pre 1 April 2020
Indemnity
- Guaranteed renewable
- Supplementary benefits
- Insurable income percentages maintained throughout a claim
Today
Indemnity
- Guaranteed renewable for a 5-year term
- No supplementary benefits
- Insurable income percentages may fall and reduce on a long-term claim
From 1 October 2021
How will the income protection changes impact me?
Most insurers are still designing their contracts which are likely to be released later in the year. However what we do know is that these contracts will be much more restrictive than policies currently available, as well as the agreed value polices that were offered prior to 1 April 2020.
To put these changes into context and highlight the possible differences between the cover, we explore the three types of policies below with Doctors Julie, Kim and James.
Meet the line-up
Occupation: Anaesthetist
Income at claim: Earning $300,000 p.a.
Policy Type Income: Protection Plus
(Pre 1 April 2020)
Amount insured: $20,000 per month
Benefit type: Endorsed agreed value
Waiting period: 90 day
Benefit period: Age 65
Occupation: Anaesthetist
Income at claim: Earning $300,000 p.a.
Policy Type Income: Income Protection Plus
(Pre 1 October 2021)
Amount insured: $20,000 per month
Benefit type: Indemnity
(which allows you to use your highest-earning 12 months of income in the last 3 years prior to claim to justify your benefit)
Waiting period: 90 day
Benefit period: Age 65
Occupation: Anaesthetist
Income at claim: Earning $300,000 p.a.
Policy Type Income: Income Protection Standard
(from 1 October 2021)
Amount insured: $20,000 per month
Benefit type: Indemnity
(which is based upon your income in the 12 months prior to claim)
Waiting period: 90 day
Benefit period: Age 65
The scenarios
Scenario 1 | agreed value and indemnity policy variations in the event of a claim
After suffering a significant back injury requiring surgery, the doctor is unable to work for six months before returning to work at full capacity post recovery. In the 12 months prior to their injury, elective surgeries were reduced due to a global pandemic causing their income to drop to $200,000 p.a. (rather than the $300,000 they had been earning previously).
As Julie has an agreed value policy and provided evidence of income at application, she is not required to provide further evidence when she makes her claim. So even though Julie’s income had reduced recently, she would still receive the agreed value benefit of $20,000 per month.
Kim has an indemnity style policy which requires her to provide evidence of her income at claim where she will be paid a maximum of 75% of her insurable income. Kim’s insurable income is based on her highest-earning 12 consecutive months of income in the last three years which is $300,000. Therefore she will be paid 75% of this that equates to a benefit of $18,750 per month.
James has a new indemnity style policy which requires him to provide financial evidence at the time of claim and will provide benefit payments of up to 70% of his insurable income over the last 12 months. Since James’ income has fallen, he will be paid 70%* of his insurable income of $200,000 which equates to a benefit of $11,666 per month.
Key take away
An agreed value benefit can provide more certainty of the amount you will be paid in the event of a claim. The indemnity policy is not guaranteed, so there is a risk that you may receive a lower amount than you are insured for and/or expect in the event of a claim. It is also important to note that a much stricter definition of disability will apply to the policy post October 2021.
*The above and following illustrations are based upon a recently released product called AIA Core Income Protection. This product allows for 70% of your income to be insured, however, APRA guidelines have indicated that insurers may be able to provide up to 90% of insurable income in the first six months of a claim with a required decrease to at least 70% thereafter.
Scenario 2 | long-term claim benefit variations
The doctor develops severe and debilitating carpal tunnel syndrome and is unable to ever work again as an Anaesthetist.
Julie will receive her benefit of $20,000 per month (indexed) until she turns age 65.
Kim will continue to receive her benefit of $18,750 per month (indexed) until she turns age 65 as her pre-disability income was based on her highest-earning 12 consecutive months of income in the three years prior to claim.
James’ policy will provide him with 70% of his earnings in the 12 months immediately prior to claim, which equates to $11,666 per month. It is also likely that under the new APRA rules, the definition of disability will become more restrictive for longer-term claims (perhaps even as soon as after 2 years on claim).
Key take away
In the event of a long-term claim, an assessment under a comprehensive agreed value or a current indemnity policy provides protection against a short-term fall in income. The policies available from October 2021 will have a stricter definition of indemnity and a requirement to change the definition of disability and/or have your payments reduced at some point, in the event of a longer-term claim.
Scenario 3 | claiming supplementary benefits
The doctor has a skiing accident while on holidays and breaks their lower leg. They are only off work for a few days before returning at full capacity.
As Julie has a Comprehensive or “Plus” Policy, it includes a specified injury benefit which entitles her to 2 months of her monthly benefit payment (even though she is back at work and did not meet her waiting period). She will therefore receive a $40,000 benefit payment.
Kim also has a specified injury benefit as part of her policy therefore she will be entitled to a benefit of $40,000 even though she is working and has not met her waiting period.
James’s policy is not able to include a specified injury benefit therefore he is required to be off work for longer than his waiting period to receive a benefit. As he was not off work for longer than 90 days, he would receive no benefit under his policy.
Key take away
Policies that are issued prior to October 2021 allow you to have a comprehensive policy which includes supplementary benefits (such as the specified injury benefit), which can be paid even where you have not met your waiting period and if you continue to work. From October 2021, these benefits will not be available due to the changes mandated by APRA.
Scenario 4 | future rate increase predictions on different policies
During their annual insurance review, the doctor enquires about the expected long-term forecast on premiums for their policy.
Julie’s agreed value comprehensive policy has proven to be unsustainable therefore APRA mandated that it be removed from sale. There is an expectation that the premiums will continue to rise to due the unprofitable nature of these policies.
With Kim’s current indemnity policy, there is an expectation that these policies will be more sustainable than agreed value policies over time. However, as her policy is also a comprehensive policy with more generous definitions of disability and pre-disability earnings, it is still possible that they will be subject to profitability pressures and premiums may continue to increase.
James’ policy is more restrictive and is less likely to be subject to profitability issues. Therefore, it is more likely that his premiums will be more stable and predictable moving forward.
Key take away
Predicting future premium increases is very difficult due to the range of factors that impact the profitability of Income protection policies.
Scenario 5 | requirement for limited underwriting every 5 years
Six years after obtaining their policy, the doctor’s personal circumstances have changed and they are unsure if they are required to disclose this to their insurer or how their cover will be impacted.
Julie’s policy is a guaranteed reviewable policy which means the terms and conditions cannot be altered to her detriment provided she continues to pay the premium and does not let the policy lapse. This means Julie could change her occupation, take up smoking or a hazardous pursuit like skydiving and her policy will not be impacted.
Kim’s policy has the same guaranteed renewable nature as Julie’s policy therefore there is no requirement for her to disclose any changes after she is initially underwritten for the policy and the policy terms and conditions cannot be altered to her detriment.
James’ policy has a five-year guaranteed renewable term, at which time James can elect to continue the policy for another 5-year term based on the policies available at that time. The policy will not be medically underwritten; however, James will need to provide information relating to his occupation, income and pastimes. His sum insured may be reduced, his occupation rating (impacting premiums) may change and exclusions may apply to pastimes.
Key take away
A 5-year guaranteed renewable policy term and the requirement to be partially underwritten every 5 years is a significant change in the retail insurance industry. If you are taking out a policy after October this year, it important to be aware of this requirement and how this may impact your policy terms and conditions in the future.
Income protection policies are changing – understand your options before it’s too late
The APRA changes have increased the complexity of comparing the features and benefits of income protection policies. If you currently have, or are thinking about obtaining income protection, now is the time to speak to a specialist insurance adviser to discuss your options. Investigating your options now will allow you to weigh up the benefits of the current more comprehensive policies, compared to the more restrictive policies that will be available from October 2021.
To learn more about the changes or to gain a better understanding of how you may be impacted, call 1800 093 485 or click here to book a complimentary no-obligation consultation.
General information warning
This is article contains general information only and does not consider your personal objectives, financial situation or needs. You should assess whether the information contained in this communication is appropriate in relation to your own objectives, financial situation or needs. If you are considering the acquisition of a particular financial product, you should obtain a copy of, and consider, the Product Disclosure Statement for that product before making any decision. We recommend that you seek specialist insurance advice in relation to the upcoming changes to insurance policies and prior to applying for any income protection insurance product.
This communication has been prepared based on our current understanding of the upcoming APRA changes and the AIA Core Income Protection product that is only product that has been released in light of these upcoming changes.
Key terms explained
Agreed Value (no longer available)
Pre-disability income is generally based on the highest monthly income in any 12 consecutive months during any period from two years prior to policy commencement to the date of disability. The monthly benefit payable is capped at the insured monthly benefit. Financial evidence can be provided at application, or time of claim, and is not required if the Agreed Value Policy was offered under a newly qualified professionals package.
Some insurers refer to Agreed Value policies issued after the provision of financial evidence as Endorsed Agreed Value.
Indemnity (prior to October 2021)
Pre-disability income is generally based on the highest average monthly income in any 12 consecutive months, within the 12, 24 or 36 consecutive months immediately prior to disability. The monthly benefit payable is the lesser of the sum insured and 75% of pre-disability earnings, subject to a sliding scale for amounts above $26,667.
Indemnity – from October 2021
Pre-disability income will generally be based on the monthly income in the 12 months immediately prior to disability (there will likely be exceptions for up to 12 months of unpaid leave). The monthly benefit payable is capped at the lower of the sum insured and 90% of pre-disability income (although this is likely to be a lower percentage when the new products are released), likely subject to a sliding scale for amounts above $26,667 for the first 6 months of a claim. The insured percentage must be no more than 70% after 6 months on claim and it is possible that the percentage will be lower than the requisite 70% at some point in a longer-term claim.
Guaranteed renewable
A policy is guaranteed to be renewed under the same (or better) terms, conditions and definitions as long as premiums are paid on time, until policy expiry. Policy expiry for income protection is generally the same as the benefit period (for example to age 65). Guaranteed renewability applies regardless of changes in occupation, health and pastimes.
Supplementary benefits
Comprehensive income protection policies include a range of supplementary benefits including the specified injury benefit, crisis benefit, bed confinement benefits and family care benefits. These often result in payments during the waiting period and in some cases are paid in addition to the monthly benefit.
