Changes to income protection will allow insurers to downgrade policies

Russell Cain Updated: 29 September 2021

Income protection in Australia will never be the same; further changes to new income protection policies will force insurers to only offer income protection contracts for up to a five year period. The income protection changes add a level of uncertainty for new policyholders, but there is still time to get appropriate cover before the changes take effect.

These drastic measures are part of a series of changes to income protection policies mandated by APRA at the end of 2019. Changes include rules which ensure that benefits do not exceed 90% of earnings for the first 6 months and then at 70%. No more guaranteed renewable policies up to typically age 65 and stricter disability definitions for longer benefit periods.

The impact of changes to policy periods and new powers for insurers

All new contracts offered by insurers from 1 October 2022* will now be limited to a period not exceeding 5 years. After this period, insurers can decide not to renew contracts or even downgrade existing policy terms / offer after 5 year to existing policy holders at this time.

These changes could potentially empower Insurance companies to focus on market segments that are lower risk resulting in unfavourable terms in contracts for policyholders. The impact of a downgrade could be especially negative for the self-employed or small business owners that are dependent on market forces outside their influence.

*Implementing of the policy term contract measure was postponed by the regulator to 2022, after industry feedback indicated it couldn’t be delivered by the original October 2021 timeline.

The proposed changes is in stark contrast to the current offering where Retail income protection policies are typically guaranteed renewable (cannot be downgraded by the insurer) typically up to age 65. This gave the consumer far more certainty over the features, policy terms and conditions for the life of the policy,

Why did the regulator institute changes to income protection?

Ongoing industry losses worried APRA as it could lead to an increase in premiums for consumers or even the nonpayment of claims. In a letter to insurers in December 2019 the regulator explained the changes were aimed at addressing problems with some products’ features around indemnity and the long time horizon of existing policies’ terms and benefit periods.

What can people do to soften the blow

The mandated changes to income protection cover have been almost 2 years in the making. Some insurers have started an early rollout of what’s to come as they will benefit from lower claim payments for the new policies. Anyone interested in getting income protection should get appropriate cover sooner rather than later. Time is of the essence.

Who needs income protection?

Anyone earning an income can benefit from income protection as these types of policies ensure you’re taken care of if you can’t work. The policy typically pays out up to 70% of your income for a maximum benefit period.

Income protection can be especially important to people who:

  • are self-employed or own their own business, seeing that they might not have annual or sick leave
  • have significant debts they will need to make repayments on, even if they are unable to work
  • have dependents or family members that rely on their income
  • People with ongoing monthly expenses need to be paid for from their personal exertion.

Frequently asked questions & answers

  • How will income protection benefits be calculated after the changes?

    Benefits will now be based on the last 12 months of earnings only if you have a predominant stable income or on the average annual earnings of a period appropriate for your specific occupation if your income is variable.
  • What is the timeline for the APRA changes to income protection?

    The regulator originally announced the impending changes towards the end of 2019. The first major change was implemented on 31 March 2020 when new applications for Agreed Value income protection were discontinued and these changes will be fully implemented by 1 October 2021 and the policy term contract measure by 1 October 2022.
  • What is the end of agreed value income protection?

    APRA mandated that insurers could no longer offer agreed value income protection policies after 31 March 2020. All new income protection claims after that date would rely on your income for the last 12 months.

Source: Apra.gov.au/final-individual-disability-income-insurance-sustainability-measures (April 2021)

Apra.gov.au/individual-disability-income-insurance-deferral-of-implementation-of-policy-contract-term-measure (May 2021)

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