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?
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.
Like everything in life, there is a trade-off normally between cost and quality, but the thing with insurance is a slight change in a definition, which no doubt will favour the insurer, can make-or-break your income protection claim. To put it succinctly, insurers now have to offer a ‘watered down’ style of income protection that is harder to claim on, harder to stay on the claim, and pays you less.
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.
Note: This information refers to retail insurance policies, not the cover provided through your super fund, or the junk you see on TV.
1. Claim amounts are assessed differently
Traditionally income protection policies would look back at the last two to three years of income to determine the highest income year to determine the amount of income protection your insurer will pay in the event of a claim. This means that even if you have taken time off in the last 12 months for maternity, travel, etc., you will still receive full benefits. From 1 October 2021, the insurer will only consider your income earned in the 12 months prior to the claim. This means that if you have not worked for a certain amount of time in the past year, you may not receive your full insurance benefits. This small change can add up to thousands of dollars of lost benefits during your claim.
2. More difficult to stay on the claim – own occupation V’s any occupation
This is one of the biggest changes. To make a claim on your policy you would need to show the insurer you couldn’t complete the key duties of your occupation and hours to match. So, with the older style policies if this definition is fulfilled you could remain on a claim for as long as the policy stipulates (quite often to age 65).
With the new style policies, the insurer will now change their assessment after two years on claim. After two years your claim would then start to be assessed against your inability to complete “any suited occupation.” Therefore, if the insurer thinks you can do a suited job, even if you think you can’t, they have the ability to stop paying you.
3. Maximum benefits allowed are reduced
Even when you can verify your income and are eligible to be paid the full insured amount on your policy, insurers are now paying less. Traditionally income protection policies would allow you to be paid up to 75% of your gross earnings (including super). With the new style policies, a lot will cap this at just 60% (some can do 70% now) and they won’t even include super in that figure either. A lot of insurers will even pay 70% for the first two years then drop it back to 60% too. The level of payout seems to vary a bit with each insurer, but it is definitely much less than what it was prior to Oct’21. If you have a long-standing claim this can have a big impact.
4. Capability clause introduced
This clause means that if the insurance company determines that you are medically fit to return to work they can stop paying you at their discretion. In particular, the main focus is on how a claim is treated where the Insurer is of the opinion that the Insured is capable of returning to work on a partial or reduced basis but:
– the Insured’s own medical practitioner does not believe that the claimant is capable of undertaking ‘appropriate work’; or
– there is no ‘appropriate work’ available due to the claimant’s sickness or injury.
The outcome of this clause is that the insurer can;
i) Reduce payments if the insurer thinks you have the capacity to work; and/or
ii) Deem you to be partially disabled rather than totally disabled, which means you will be paid less than the full amount you are insured for.
Traditionally, a lot of income protection policies prior to Oct’21 didn’t have this clause but all the new policies now have it now, except for one insurer who only covers certain professionals (Ask me if interested).
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.