APRA changes: Why you need to sort your income protection right now
Your income protection insurance options will shrink after September.
A number of sweeping changes from the financial regulator the Australian Prudential Regulation Authority (APRA) are set to water down income protection insurance for many.
The income protection sector has been hit by $3.4 billion in losses over the last 5 years. To help stem the damage, in late 2019, APRA told life insurers that they intended to shake up income protection policies. This process started on 31 March last year.
The raft of changes needs to be completed by 1 October 2021 and will lead to much less generous income protection policies for some consumers.
What's changing with income protection insurance?
Some of the rule changes have already happened. For example, agreed value income protection policies are no longer available.
Agreed value policies are particularly beneficial if you're self-employed or your income fluctuates from month to month. This is because they pay out a set amount based on your income at the time of application. However, new applicants will now have their monthly benefit based on their income at the time of claim.
The 1 October changes are as follows:
- Benefits can no longer exceed 100% of your earnings. In fact, benefits will be capped at 90% of earnings at the time of claim for 6 months, then at 70% after the 6-month period.
- Guaranteed renewable policies will no longer be a thing. This means that your insurer can revise the terms and conditions of a policy every 5 years as it sees fit, potentially making it harder for you to claim or even increasing your premiums. If your earning capacity changes at all over those 5 years, you could be hit hard.
- Stricter disability definitions will apply to longer-term benefit periods. This could lead to some people having to find work before they are ready.
Finder's research team looked at 11 policies you can buy directly from insurers — only two come with a benefit period that can cover you up to the age of 65. If you lock in one of these policies now, you won't be impacted by the changes set to come into place by October (correct as of 5 May 2021).
Why should I care about the new rules now?
For a number of years, income protection policies have arguably been stacked in the consumer's favour. But that's set to change. APRA is seeking to reduce the overall payout to people, thereby making it more affordable for insurers to continue to fund policies.
Financial adviser Luke Hanson told Finder: "One of the biggest risks, if you're on a less steady income, is that you may pay for cover that you're not able to fully claim on.
"Let's say you're self-employed and are earning $50,000 a year, and after 1 October you take out a new policy up to the maximum of 75% of your wage.
"When it comes to claim time, if you've not, in fact, earned that $50,000 per year recently, you may not be able to claim on that level – even though you've been paying for it."
Hanson, who is the Director of My Financial Design, added: "For people who are looking at income protection, taking out a new policy now provides an opportunity to get in on some more flexible and generous terms that will disappear come 1 October."
What is income protection?
Income protection is a type of insurance policy that pays a monthly benefit of up to 75% of your income if you get sick or have an accident that means you need to take some time off work. This benefit can help you to keep up with bills and other living expenses while you recover.
What other options do I have for protecting my income?
One option is to look at your superannuation fund. Many employers offer income protection as an option to employees by including it as part of super benefits, although these plans tend to be more basic than standalone cover.
While all income protection programs will be affected by the rule changes, they're less likely to hit super funds because of the more basic nature of these plans.
Using any other savings or investment products could be another option for some. But, as Hanson notes, "income protection covers more than just the medical side of things – it's keeping your lifestyle going. It can pay for your mortgage and meet other living expenses."
It's not too late to lock in a guaranteed renewable policy. For example, according to NobleOak's PDS, it guarantees to renew your insurance cover each year up until the expiry age that applies for the cover. This means that you still have the opportunity to lock in a policy with a benefit period covering you up to the age of 65.
If you're yet to take advantage of the current benefits of income protection, now could be the time to do so.