On 1st October this year, new government regulations have been introduced which have forced changes to income protection policies offered by Australia’s life insurers.
So what has changed?
All Income Protection policies on offer after 1st October have reduced benefits when compared to most older policies.
Some changes include:
- Income replacement ratios have been reduced from 75% to 70% and in some cases 60%.
- Income is to be calculated on the last 12 months income, compared to some previous policies which allowed up to 3 years to establish pre-claim income. (There are some caveats for certain instances, such as maternity leave).
- Longer term claims – generally over 2 or 5 years – will now be subject to an ‘any’ occupation definition rather than the previous ‘own’ occupation definition
If you have an existing (retail) policy, you will be able to make changes, including increases, to your existing policy. Your existing policy is now very valuable, and should not be cancelled or replaced without serious consideration or professional advice.
Australian life insurers have been losing money at alarming levels on income protection products in general. Over the last few years, we have seen extreme premium increases across the board, my own income protection policy increased 48% last year. Consequently, APRA has stepped in with these changes, designed to help with premium stability and to make premiums more sustainable over the long-term.
It is still very early days, however, premiums for new policies from some providers do appear to have reduced at this stage, time will tell as to how successful these changes have been.