Changes to income protection insurance

What is income protection?

Also known as ‘salary continuance insurance’ or ‘disability income insurance’, income protection provides a portion of your income, for example 75% of your annual salary, if you are unable to work due to injury or sickness for a certain period of time. You need to advise your annual salary when you take out the cover.

Income protection policies always have a waiting period and a payment period. The waiting period is the time you must wait from when you make a valid claim, to the time you become eligible to start receiving payments. The payment period is the period you can be paid so long as you remain unable to work. Other terms and conditions apply depending on the policy. All of these factors affect the level of premiums you pay.

What are the changes?

Recently, the Australian Prudential Regulation Authority (APRA) announced that it is concerned that insurance companies have been keeping premiums at unsustainably low levels to compete for customers. APRA also think that some policies have very generous features and terms that, in some cases, provide a financial disincentive for people to return to work after successfully making a claim.

Has APRA announced what changes will be made?

Yes, effective from 31 March 2020, insurance companies must:

  • stop providing ‘agreed value’ policies that are based on the income you advise at the start of cover, regardless of any subsequent change in income. This means no more ‘agreed value’ contracts can be bought or sold after 31 March 2020.

What other changes are likely to be made?

Other changes, effective from 1 July 2021, include:

  • your insured income is to be based on your annual income at the time you make a claim, and are not able to look back more than 12 months
  • limits of 100% of income replacement payments can be made in the first six months and 75% thereafter, with a total limit of $30,000 per month
  • a maximum payment period of five years, with a right to renew cover
  • insurance providers must have adequate risk management processes in place to mitigate the risks associated with long term benefit payment periods.

APRA is seeking feedback on the above changes from the industry by 29 February 2020 and will make a final decision by 30 June 2020.

What happens to existing policies?

If you have an existing retail income protection policy which include a ‘Guarantee of Renewability’ in the policy wording, that is, the policy is automatically renewed each year, your policy will continue.

Are policies which meet APRA’s new expectations available now?

No, to purchase an income protection policy which takes into account APRA’s changes we need to wait until the insurance providers have issued new policies with new Product Disclosure Statements.

More information

For more information, please read APRA’s media release or contact our financial adviser, Dev Sarker today at 1300 71 71 36.


Small steps to great success

If you want to get ahead, financially, it’s necessary to take some steps to get there. It may seem daunting and overwhelming but like anything, if you have a professional guiding you along the way, small steps can lead to something great.

Step 1 | Seek advice

It’s hard to achieve great success without a team of experts behind you and your wealth is no different. Getting professional financial advice means your adviser can work through a myriad of options with you and implement a strategy aligned closely to your financial goals. Retirement planning, tax-effective super strategies, investments and estate planning? Your financial adviser can help.

Step 2 | Understand what role risk plays

One of the first things your financial adviser will do is work out your risk profile, which they will check at regular review meetings. Why? Because risk is related to return, and this will help drive the recommendations they make to you in terms of your financial plan. Generally, the higher the risk, the higher the return. While some people like higher risk investments because they have the potential to deliver higher returns, others prefer less risky investments. It’s important to remember that markets are cyclical and shares are a long-term investment so if the market wobbles, your financial adviser is best placed to keep an eye on your investments and determine if they remain aligned to your overall financial strategy.

Step 3 | Check your super

Your superannuation could be your largest asset, other than your own home. Given it’s such a large sum that you have been contributing to for years and years, and you are relying on it to sustain you in your retirement, isn’t it something you want to get right? Sure, it’s a long-term investment, but it’s important that it is invested in-line with your risk profile and financial goals. And you DO have options. As well as your employer contribution, you can kick in a bit extra through salary sacrificing. Contributing more to super will not only boost your account balance, it could reduce the amount of tax you pay.

Step 4 | Stick to a budget

Sounds boring, right? But a budget is not boring, it’s empowering!! Setting a realistic budget helps you understand where your money is going, what can be trimmed and where you can invest to save for your future. Understanding your overall financial health and having a budget aligned to your financial goals gives you a real understanding of the benefits of working with a financial adviser. You can start to see a real change in your circumstances. Having a budget doesn’t mean giving up things you want, it just means you plan for them and you make sure you can afford them BEFORE you spend the money. Setting and sticking to a budget is really the simplest way to help you get ahead.

Need advice? We’re happy to help. Call 1300 71 71 36 to speak to a financial adviser today!