Changes are happening to income protection insurance. One of the main changes has already taken effect and we discussed it in an article two weeks ago. There are two more major changes, the first of which we discuss this week. We will discuss the final change next week.
Income Protection Insurance – a Recap of our Recent Recap
As we wrote a couple of weeks ago, income protection (‘IP’) insurance allows you to protect your personal income if you become sick or injured and cannot keep working as a result. It addresses the loss of personal exertion income. If you or someone else would suffer financially if you are unable to keep working, you should strongly consider IP insurance. Premiums are often tax deductible, so it is important to arrange type of insurance properly.
If you do not have IP, or you think your IP needs a review, please contact us immediately.
APRA’s Review of Income Protection Insurance
The main regulator of risk insurance is the Australian Prudential Regulation Authority (‘APRA’). Over the last couple of years, APRA has reviewed the way in which IP insurance is provided by insurers. The review has been largely in response to changes in how people work and how they sometimes become injured or ill.
APRA’s review has led to a number of changes which were recently discussed and summarized in a letter from APRA to life insurers on September 30 2020.
Change #2 – Limits on the Size of Payments in the Medium to Long-Term.
APRA has stated that it expects future IP policies to meet the following criteria (quoted from APRA’s September 30 letter):
- Insurance benefits, taking account of all benefits paid under the IDII [IP] product, do not exceed 90 per cent of earnings at time of claim for the first six months of the claim and do not exceed 70 per cent of earnings thereafter;
- Indexation of benefit payments (before income offsets are taken into account) to the claimant throughout the claim duration should be limited to a suitable inflation index;
- Payments to third parties to support return to work initiatives focused on rehabilitation and retraining (to the extent that it is possible under current legislation) may be made in addition to the above income replacement limits; and
- Where superannuation contributions are excluded from income at risk, any insurance benefits related to these contributions can be paid in addition to the above income replacement limits. In all instances, insurance benefits related to superannuation contributions should be paid into a superannuation fund and not to the claimant.
This series of criteria for benefit payments continues the theme that a person will no longer be able to insure themselves for more than the amount of income they actually lose. It is hoped that this will give an incentive to people to return to work (and stop receiving benefits) wherever possible.
In the first six months of a claim, any benefit payment is to be ‘capped’ at no more than 90% of the actual income lost. After that, the cap falls to no more than 70% of the amount of income lost. So, the changes effectively limit the amount of income that can be paid. In concert with the move to indemnity-type policies only, which we discussed on October 30 2020, the total effect of the change is that claimants receiving long-term benefits will now receive no more than 70% of their actual income immediately prior to becoming unwell and unable to work.
In some cases, this will be a reduction from the figure generally (although not always) used before the changes, which was 75% of actual income lost.
Payments made over an extended period of time will still be eligible for indexation. Indexation is where future payments are adjusted for changes in the purchasing power of a dollar. For example, if inflation reduces the purchasing power of a dollar, then indexation would see claimants receive more dollars to ensure that their purchasing power stays constant.
APRA is requiring that a standard measure of inflation be used as the basis for this indexation. This is likely to at least include the Consumer Price Index (‘CPI’) will be that measure. The CPI is calculated by the Australian Bureau of Statistics and is the most widely-recognised inflation measure in our economy.
Timing of These Changes
The key date for the change described above is 1 October 2021.
Please note that the suggested changes will not apply retrospectively. Existing policies with other conditions (for example, that pay out up to 75% of lost income) remain in place.
It goes without saying that changing policies at the moment is something to be done with the utmost care. Similarly, if you are looking for a new policy, then timing the commencement of that policy is also crucial. So, if you or someone you love is contemplating new or changed IP insurance, please do not hesitate to get in touch.