During the last two years, the Australian insurance industry has seen some of the biggest changes in its history which may be relevant for Income Protection for doctors, these changes required by the Australian Prudential Regulation Authority (APRA) were aimed at moving the industry and in particular Income Protection back to a financially sustainable position.
The need for change was brought to light when APRA revealed that in the 5 year period up to December 2019, life insurance companies collectively lost around $3.4 billion through their income protection offering.
As a result of this need APRA announced several changes that aimed to address this unsustainability through the creation of new product guidelines with a focus on sustainability. The changes allow people to continue to attain the protection and peace of mind that income protection policies offer, whilst making the products more viable in the long term for insurance companies.
The first change occurred on 1 April 2020 with the removal of agreed value income protection policies. This style of policy guarantees a claimant the monthly benefit they are insured for, even if it is higher than their earnings at the time of claim. From 1 April 2020, the policies available to new applicants were offered on an indemnity only basis which required the policy owner to provide evidence of income to support the insured monthly benefit at the time of a claim. While these policies 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.
Due to the magnitude of these changes APRA allowed insurers 18 months to develop and introduce their new sustainable income protection offering. The deadline of 1 October 2021 saw all existing income protection policies closed to new business and the launch of new, more sustainable income protection products.
What do the latest changes mean for me?
If you currently hold an existing agreed value policy or a pre 1 October 2021 indemnity policy, these are now grandfathered, which means the policy terms and conditions cannot be changed to the detriment of the policy holder. Insurers do however have the ability to continue to increase the premium on these policies, which has been a common occurrence over the last few years.
While APRA created guidelines for insurers to follow when creating their new offerings, these have been interpreted in many different ways which has resulted in a much broader range of benefits and features available. These differences have added another level of complexity for people who are seeking income protection insurance, or for those who are considering making changes to their existing cover.
Major differences between insurers includes:
- The maximum monthly benefit that can be insured. Some insurers will allow you to apply for a monthly benefit of $30,000 if your income is $514,000 while others require an annual income of around $1,300,000 to apply for the same monthly benefit.
- Depending on insurer and policy, a claim may be assessed as to whether you can work in your own occupation for the life of a claim, where as other insurers change the definition you are assessed against, to whether you can work in any occupation that you are reasonably suited or capable of performing based on past education and experience, after 2 years of being on claim.
- Depending on the insurer, benefit payments may be reduced by sick leave accrued, while others only offset sick leave taken and paid.
Pre-disability earnings for agreed value policies is based on the best 12 consecutive months of income at any time from 2 years prior to policy commencement to the date of disability and for indemnity policies this is generally based on the best 12 consecutive months in the three years prior to disability. From October last year, pre-disability earnings at time of claim, are based on the 12 months immediately prior to disability. Depending on insurer, limited extensions of 12 months may be available, for instance, during periods of unpaid leave such as parental leave.
A number of benefits and features have also been removed from the new product offerings which reduce the availability of upfront claim payments and may make a policy more difficult to claim against.
While the APRA changes are designed to secure the viability of the Income Protection policies that has been functioning in an unsustainable manner, the changes will have an impact on existing policy holders in the form of likely continued rate increases, policyholders that are looking to vary their policies, as well as for people looking to take out a policy for the first time.
The broader range of benefits and features, definitions and quality of cover makes speaking to an Insurance Consultant more important than ever. By establishing your goals and priorities, they will guide you through the process of reviewing your needs and recommend an appropriate cover for your personal situation. You can book a no-obligation appointment to chat with a DPM Insurance Consultant about your personal situation.
General information warning:* This 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 prior to making any decisions in relation to your income protection needs.
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