Increasing insurance premiums have been a recent theme in the Australian Insurance market. Premiums have increased due mainly to a significant increase in claims (think mental health), adverse investment conditions and now mandated changes imposed by the government.

Following an increase in premiums, people quite understandably review their insurance premiums and try to find an alternative provider that is cheaper. As most of the increase in premiums of late has been attributable to income protection, I have outlined why you should really think twice, or three times, even four about cancelling your current income protection policy, if it was obtained prior to October 2021.

Why October 2021?

For years prior, insurers were experiencing claims exceeding the premium collected (a loss) hence on On October 1st, 2021, new changes were implemented for income protection insurance policies in Australia. These changes were introduced by the Australian Prudential Regulation Authority (APRA) as part of its Superannuation Industry (Supervision) (SIS) reform package. The idea was insurers needed to change their policies so that they can create a more sustainable insurance industry because pretty much every insurer in Australia was making a loss on their income protection offerings.

The new income protection policies still pay claims and are still good to have but if you compare to policies obtained prior Oct 2021 they can be fairly different. The new style of policies seem to be more geared towards rehabilitating and moving you back into work, and uses the insurers opinion, taking into account medical records to do so. Compare that to the older style policies where they were deemed to be too generous, as such they are easier to make a claim on and then easier to stay on claim. These differences can be reflected in policy pricing.

Pricing from insurers seems to be centered around increasing premiums for those pre-october 2021 policies who have long benefit periods (‘to age 65 benefits’), those on level premiums (stepped premiums v’s level premiums) and agreed value policies. Remember, the insurers increase premiums to cover their expected claims.

The below outlines some of the major considerations of the new style of policies, which is why I normally advocate for people to retain their existing policy rather than be seduced by a cheaper premium with another insurer. After all, it is in times of need that the value of your insurance comes to the forefront, so quality is important. There are some other way to reduce the premium of your existing policy, although it comes at a loss of benefits.

Note: This information refers to retail insurance policies, not the cover provided through your super fund, or the junk you see on TV.

Summary of Major Differences

Detailed Breakdown of Key Changes

Here is a more in-depth look at what each of these changes means for a policyholder.

1. Contract Type: Agreed Value vs. Indemnity

• Pre-Oct 2021 (Old): You could get an “Agreed Value” policy. This meant you proved your income at the time of application, and that monthly benefit amount was locked in. If your income dropped years later, you would still be paid the full, agreed-upon amount.
• Post-Oct 2021 (New): All new policies are “Indemnity Value.” This means your benefit is based on your income at the time of your claim.

2. Definition of Pre-Disability Income

• Pre-Oct 2021 (Old): To calculate your pre-disability income, indemnity policies would often let you use the highest 12 months of earnings from the previous 2 or 3 years. This was a crucial buffer against a recent dip in income.
• Post-Oct 2021 (New): The calculation is now strictly based on your earnings in the 12 months immediately before your claim.

3. Total Disability Definition (The “Duties” Test)

This is a critical change to the fundamental test of disability.

• Pre-Oct 2021 (Old): Most policies had a “three-tiered” definition. You were considered totally disabled if, due to sickness or injury, you met any of the following:
  1. Duties Test: Were unable to perform one or more of the “important duties” of your occupation.
  2. Hours Test: Were unable to work in your occupation for more than 10 hours per week.
  3. Income Test: Were earning less than 20-25% of your pre-disability income.The “one important duty” test was the most generous and the easiest to meet.
• Post-Oct 2021 (New): The generous multi-tiered definition is gone. New policies generally have a single, stricter definition. To be considered totally disabled, you must be unable to perform the “material and substantial duties” of your occupation (i.e., the duties that generate your income). You can no longer be classified as totally disabled if you can still perform some important duties but not others.

4. Disability Definition (The “Occupation” Test)

This test works in conjunction with the “Duties” test above and determines which occupation you are being assessed against.

• Pre-Oct 2021 (Old): Many policies offered a true “Own Occupation” definition for the entire benefit period (e.g., to age 65). This meant you could claim if you were unable to perform the specific duties of your job.
• Post-Oct 2021 (New): Policies now have a tiered occupation definition.
  • First 24 Months (approx.): The “Own Occupation” definition usually applies.
  • After 24 Months: The definition typically switches to an “Any Occupation” test. This means the insurer will assess whether you are capable of working in any occupation for which you are suited by your education, training, or experience (ETE).

5. Assessment of Disability & “Capacity to Work” Clauses

This is the new mechanism insurers use to manage claims, especially long-term ones.

• Pre-Oct 2021 (Old): The assessment was more straightforward. If you met the “Own Occupation” definition (i.e., you couldn’t do your job), you were paid.
• Post-Oct 2021 (New): Insurers have explicitly added “capacity to work” (or “capability”) clauses. This allows the insurer to make an assessment of your potential to work, not just your actual work status. Your benefit can be reduced based on what the insurer believes you could be earning, even if you are not earning it. This is the enforcement mechanism for the “Any Occupation” test after two years.

6. Income Replacement Percentage

• Pre-Oct 2021 (Old): It was common to get a flat 75% of your income for the entire claim. Ancillary benefits could sometimes increase this to over 100% of your income.
• Post-Oct 2021 (New): Benefits are now tiered and capped. The maximum you can receive is:
  • First 6 Months: 90% of your pre-disability income.
  • After 6 Months: 70% of your pre-disability income.This is designed to create a stronger financial incentive for you to return to work.

What This Means for You

• If you have a pre-2021 policy: It is likely a highly valuable asset that offers a level of coverage no longer available for purchase. The “one important duty” definition and the “Own Occupation” definition for the life of the policy are key features that are now unavailable.
• If you are buying a new policy: You must be aware of the new, stricter limitations. It is much harder to meet the “total disability” definition, and the policy is explicitly designed to assess your capacity to return to any suitable work after two years.

What about cover obtained through my Super Fund?

Cover obtained through your super fund may be cheaper, but we often find it’s actually more expensive once you start comparing apples with apples (same sums insured, features etc). So, once you start having to change the sums insured, benefit periods etc it can become pricey. The biggest issue though is their quality. Policies 100% funded from superannuation will be more restrictive in terms of how much they can pay you, and how you qualify for a claim and then once you start going through their definitions, they can be harder to claim on. Because these policies are owned under superannuation, they sit under superannuation law (SIS Act) which adds complexity to your claim. On top of this, there are also tax considerations. This is probably a whole other topic though.

If you already have a personalised income protection policy obtained prior to Oct’21, hooray! these changes will not affect you and as long as you pay your premium you can retain your great quality policy that should provide you with peace of mind.

A lot of the time we look to adjust certain features with these older style income protection policies to reduce costs but allow you to retain the policy due to their quality.

However, if cost is a factor and a new policy is much cheaper (it’s not always cheaper) then we can also investigate this option. It would involve having to go through underwriting (health assessment) so you always run the risk that an insurer could decline your application, or impose a loading (higher premium) or exclusion (exclude pre-existing medical conditions).

If you are unsure or need to change your policy, please get in touch.