Changes imminent for income protection in Australia
Major changes are coming in April so anyone considering the coverage might want to make a decision soon.
New rules around income protection insurance are set to come into play this April – and while the updates aren't all bad, it seems there will be some serious stripping back of benefits.
One of the biggest changes is that you'll no longer be able to buy "agreed-value" income protection – which could be bad news for anyone with a fluctuating wage.
The length of time you can hold a policy will also be limited to five years, so terms and conditions will be changed more often and premiums could see more frequent hikes.
Agreed value policies to be scrapped
Agreed value income protection policies guarantee the amount you'll be paid if you have to make a claim – regardless of any changes to your earnings.
So if a piano teacher earned $80,000, and bought a policy which agreed to pay out 75% of their income, their insurance company would honour that agreement – as long as the teacher paid their premiums.
However, on 1 April, this type of policy will no longer be available. Instead, "indemnity value" income protection insurance, which is calculated based on income over the last 12 months, will be the only options.
This means the piano teacher could take out a policy which is designed to pay out 75% of their $80,000 wage, but if they had to make a claim, their insurance company would check their income over the last year. If they'd earned less than $80,000 for any reason, they'd only be given 75% of that amount.
The changes are likely to have the biggest impact on anyone who might have a fluctuating income, such as contractors, small business owners and anyone taking parental leave.
If you fall into this category, it might be worth looking into an agreed value income protection policy now, as you won't be able to get it after April 1.
Policies will have a five year maximum
At the moment, if you take out an income protection policy, the terms and conditions can be fixed for as long as you pay the premiums or until you reach a certain age.
However, when the changes come into effect, you'll only be able to hold a policy for a maximum of five years before your insurance company revisits the conditions.
This means your insurance company will be checking in more often around health and lifestyle changes – so if anything has gotten worse, you'll likely see an increase in your premiums.
These aren't the only changes set to hit income protection. There will also be stricter underwriting criteria and limits on monthly payouts (although these will cap out at $30,000 so there's only a lucky few who will be impacted).
You can read about the full suite of updates on APRA's website.
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