Entering a new era of income protection

Late last year, Australia’s income protection (IP) insurance industry underwent a major overhaul.

With insurers losing about A$3.4 billion in the five years to December 2019, the Australian Prudential Regulation Authority (APRA) enforced a series of measures to rein in products that were keeping premiums at “unsustainably low levels” and offering “excessively generous features”, to safeguard the sector’s future.

As a result of these changes, which came into effect on or before 1 October 2021, there is now a broader range of IP products available, as well as wide variability in cost.

While the changes won’t affect customers who purchased an IP policy prior to 1 October 2021, for anyone planning to take out new cover or update their existing product, here are three factors to consider.

1. No more agreed value IP cover

All new IP products offer indemnity value cover, which provides a monthly benefit to claimants based on a percentage of their income at the time they make a claim. (Some products previously calculated benefits using the highest 12 months’ earnings in the two or three years prior, but this won’t apply to new policies, except in special circumstances.) Historically, customers could purchase an agreed value policy, whereby the amount they were insured for represented a percentage of an agreed amount at the time they took out the cover. This is no longer available on new policies.

2. Insurable income is capped

APRA introduced limits on how much income could be replaced. Benefits are now capped at a maximum of 90 per cent of earnings at the time of claim for the first six months and cannot exceed 70 per cent of earnings thereafter.

This percentage tends to range from 60 per cent upwards over different benefit periods (i.e. six months, two years or longer), depending on the insurer and the product they’re offering.

A sliding scale may also be applied. The higher portions of someone’s income may only be insurable at a reduced percentage.

Customers can also choose to insure a lower amount, according to their needs. Different insurance offerings in the market tend to have different percentages within the APRA mandated limits, so always compare products carefully before making a decision.

3. Movement in disability definitions 

If a customer becomes sick or injured, and has served the relevant waiting period, they will receive monthly benefits while they’re unable to work, for the period nominated in their policy. In such cases, customers will be assessed on their inability to perform work duties.

However, as a result of the changes to IP cover, the industry is currently seeing a tendency for more products to link “disability” criteria to an inability to work in “any occupation” to which they’re suited or capable of performing, based on their education, training or experience (as opposed to the insured person’s regular or “own” occupation) after a period of time on claim – often two years, for those still on claim during their benefit period at that time.

There’s also a tendency for more products to require customers to undergo additional assessments after being “on claim” for 24 months.

When considering IP cover, it’s important to check the terms and conditions – including what kind of occupation (i.e. often “any” or “own”) is used to determine whether the disability definition is met – so that you understand the entitlement to receive benefits if you’re unable to work because of injury or illness.

With so many changes transforming the IP insurance sector, it’s never been more critical for customers to examine the scope of their cover – making sure it’s sufficient for their needs, should an unexpected illness or injury event derail their efforts to earn an income.

Similarly, customers with existing IP cover issued prior to the changes should consider their situation carefully if thinking about replacing that cover with a new product.

CPA Australia members are entitled to a discount on NobleOak’s life insurance and income protection insurance. For a quote from NobleOak, visit nobleoak.com.au/cpa

Important information – The Target Market Determination for NobleOak’s Premium Life Direct insurance is available at www.nobleoak.com.au/target-market-determination NobleOak Life Limited ABN 85 087 648 708 AFSL No. 247302 issues the products. This information is of a general nature only and does not take into consideration your objectives, financial situation or needs. Always consider the Product Disclosure Statement (PDS ) (available on the NobleOak website) to see if the product is right for you.