The Australian Prudential Regulation Authority (APRA) recently reviewed personal income protection insurance to ensure it remains sustainable and affordable. As a result of this review, insurance policies issued after 1 October 2021 are significantly different from those issued prior to this date. Here we review the changes, and what they mean for you.
What has changed?
Put simply, there has been a reduction in the amount paid against claims, and policies involve more stringent definitions and terms.
Prior to this date, income protection policies typically paid 75% of your regular income if you couldn’t work due to accident, injury or illness, through to age 65. The new policies can pay up to 90% for the first six months, decreasing to 60-70% thereafter, resulting in reduced ongoing payments.
In addition, the definition and terms have changed. Older policies continued to pay benefits if you were unable to work in your usual occupation. With the new policies, if you remain unable to work after two years, this definition changes to unable to work in any occupation. In practice, what this means is that your entitlements will cease if you are able to do any job suited to your skills and education. For example, if you were previously a carpenter but can’t return to it due to your injury, your benefits may cease at this point if you are deemed able to do other work, such as stacking supermarket shelves.
The changes may also impact those who are self-employed or have fluctuating income. Previous policies calculate the benefit based on your average income from up to three years prior to the claim, whereas new policies are based on the 12 months beforehand.
Further changes are also expected in the next 12 months.
Will my existing policy be impacted?
If you held an eligible policy before 1 October 2021, your policy won’t be subject to the changes. These policies may increase in cost, but they are some of the most comprehensive in the world. These policies cannot be reinstated, so you need to make any move within the context of your broader financial plans and with advice from an expert who can help you understand all the potential repercussions.
Will the insurances in my super change?
If you hold insurance through a retail super fund or SMSF, you likely have a grandfathered policy meaning your policy won’t change. Those with insurance via an industry fund, however, will likely be subject to the changes in the near future. It is best to speak to your adviser or the fund directly to get advice on your situation.
If I am not currently covered, is it still worth getting income protection insurance?
The answer to this is a resounding yes. Getting paid a portion of your income for the first two years is still considerably better than no protection in the event of accident, injury or illness. Many Australians are underinsured across the board, but particularly when it comes to income protection, and it can cost you and your family dearly – from your house to your lifestyle.
Apt Wealth Partners can work with you to help you understand the right policy for you and build contingencies into your financial plan that take these reduced entitlements into account.
What steps should I take?
While there is little you can do about the changes, whether you hold a comprehensive policy, have insurance through your super or aren’t covered at all, it’s important to get advice. Insurance should never be set-and-forget; it needs to be revisited regularly whenever your lifestyle or financial needs change.
I want to reiterate that if you have an existing policy, it’s critical that you do not make changes without advice. Your policy costs may increase, but your level of cover is irreplaceable. The policies held prior to 1 October were some of the most comprehensive, not just here in Australia but globally – and that could prove invaluable.
If you are concerned about your current level of insurance or want advice on the right policy for you, get in touch with the Apt Wealth Partners team.
General Advice warning
The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.
