On the 31 March 2020, the Australian Prudential Regulation Authority (APRA) announced that life companies have been keeping income protection premiums at unsustainably low levels to compete for customers. APRA expects life companies to change and review these policies. They will focus on long term sustainability and making sure products continue to meet the needs of consumers. As such, insurance companies have stopped selling ‘agree value’ policies. These policies are based on the income you earn at the start of the cover, despite any future change in income.
What is Income Protection?
Income protection pays part of your income if you are unable to work for a period of time. The cause could be due to injury or sickness and repayments could be up to 75% of your annual income. These policies 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 are able to start receiving payments. The payment period is the period during which you are unable to work that is covered. The industry is putting into place new terms and conditions. This is causing changes to the policies, affecting the amount of premiums you pay.
What will happen to my existing policies?
Current retail policies with ‘Guarantee of Renewability’ in the policy wording, is automatically renewed each year. Thus, your policy will continue with no changes.
Any other APRA changes?
With effect from 1 October 2021, APRA expects that life companies will offer new income protection contracts where:
- The insured income will be based on your annual income at the time you make a claim. It is unchangeable for more than 12 months
- In the first 6 months, up to 90% of income repayments could be distributed and 70% thereafter. There are no limits on the monthly benefit
- Insurance providers must have adequate risk management processes to reduce the risks involved with long term payment periods
APRA has deferred the following measure until 1 October 2022:
- 5 year renewal term – renewal will not be medically underwritten however declaration of income, occupation and pastime details is needed
Are policies which meet APRA’s new measures available now?
Yes, life companies are starting to release new income protection policies which meet these guidelines. However, most insurers will launch these new policies with new Product Disclosure Statements, from 1 October 2021.