Sick or injured and unable to work? Income Protection is a great product, where traditionally it would cover about 75% of your gross income (income plus super), however over the last few years this type of insurance product has been met with some strong headwinds.

The Australian Life insurance industry has been in turmoil the last few years, where a large influx of claims (mainly for mental health), and low interest rates means they have been making substantial losses on their income protection. As a result the Australian Government has had to intervene and implement changes to NEW policies (not existing) that effectively water them down, and reduce their quality.

Overall, the new policies will cover you for less, provide less benefits, and be harder to make a long-term claim on for income protection. This is why your existing policy through us is more valuable, as they cannot change the terms of the contract.

I would be thinking long and hard now if you intend to reduce or cancel your cover, as you won’t get another policy like it is now. 

Summary of Changes: 

  • They want to review your occupation every 5 years before they offer cover. If you move into a riskier occupation, they don’t have to keep insuring you. Currently you are covered if you change occupations. Currently this is not the case with existing policies.
  • They will only consider the last 12 months of earnings to determine how much income protection you can be paid. Currently most insurers will consider the last 24-36 months earnings, which is especially helpful for people whose incomes can fluctuate.  What happens if you take a sabbatical, go travelling, or are just in between jobs for a while? They will pay you less because of it.
  • If an income protection claim goes longer than 2 years, the definitions change and make it much harder to keep claiming. With the new contracts the insurer will payout in the event you cannot do your own occupation, but then after two years the definition changes and you will only get a payment if you cannot do the duties of any other occupation, considering your training, education and experience. So, if the insurer can deem that because you worked in an office for 6 months in 1996, then you can go back into a similar role, even if you don’t want to or can’t, then they can stop payments. Currently there is no such clause with most of today’s income protection contracts.
  • As the insurers incentive is to get you back to work following a claim they may look to retrain and reskill you and try put you in an occupation they think is suitable. The actual definitions in the policy mean that even if you don’t want to go into an occupation of their choice, they can still have the ability to stop payments under what we call a capability clause.
  • They will be paying less over the long term. Currently Income Protection pays 75% of gross income and super contributions but this reduces to 70% after 6 months of claim under the new policies and it wont cover any super contributions either.
  • They will be offering fewer ancillary benefits compared to what they offer now. Things like covering super contributions, carers allowance, confined to bed benefits, travel allowance etc.

Overall I think the government have gone over and above what a free market should be doing, and have intervened here to the detriment of a lot of policy holders. Thankfully, if you already have underwritten and quality cover the Insurer has no ability to alter your existing insurance contract, however if you ever do decide to cancel you will not be able to get it back. This is why I would think long and hard before cancelling any cover.