How will income protection insurance changes impact professionals?

Russell Cain Updated: 25 October 2021

Major changes to income protection are underway. These changes could directly affect one of the key tools professionals use to insure their greatest asset – their ability to earn an income.

Towards the end of 2019, life insurers were informed by APRA that they had to start making significant adjustments to new income protection policies from March 2020 up to October 2021. The changes, when implemented, will impact everyone using this type of cover. However, the self-employed, and professionals like doctors or lawyers may be impacted most.

Why the changes to income protection?

APRA decided to institute changes after becoming concerned with ongoing financial losses for life insurance companies. They felt that these losses posed a threat to income protection policies which would negatively impact Australians.

The impact on professionals explained

From 1 October 2021, Insurers offering NEW income protection policies will need to ensure that the latest rules have been implemented to ensure benefits do not exceed 90% of income replacements. As a lawyer or doctor, the maximum monthly benefit has now been capped at $30,000. Additionally, after 6 months, your maximum income protection benefit will be limited to 70% of your earnings at the time of the claim.

Self-employed professionals might see further negative repercussions after APRA stated that monthly benefits, for indemnity policies commenced, will now be based on your annual earnings of the last 12 consecutive months before you got sick or injured, if you have a predominantly stable income.

People with a variable income will however have the income at risk assessed based on the average annual earnings of a period that is appropriate for that specific occupation. There is still some uncertainty how all this will be interpreted by insurers. The safer option would be to lock in the existing benefits before changes take effect.

Prior to the 1 October 2021 changes, income protection policies typically offered:

  1. Monthly benefits of up to $60,000
  2. Cover for up to 80% of your earning (including super booster), then reverting to 75% of your income (income limits apply)
  3. Contracts that were fully guaranteed renewable to age 65
  4. Disability Definitions which were constant and didn’t become more restrictive the longer you are on claim

What can professionals do to soften the blow?

It has been suggested that these changes, although necessary to secure the viability of the industry, unfairly targets professionals and self-employed people. The good news is, there is still time for medicos, lawyers, specialists , and other professionals to lock in their income protection before the October 2021 deadline. The clock is ticking though.

If you don’t have income protection cover or have an existing policy in place, but haven’t reviewed it recently, it would be advisable to consult an insurance professional to explore the options that are currently available.

Further income protection changes

The regulator also mandated that insurers need to enforce stricter disability definitions for longer benefit periods. 

From 1 October 2022, insurers must ensure that guaranteed renewable policies are no longer made available. The implementation of the policy term contract measure was postponed to 2022 by the regulator after consultation with the industry. 

Why it’s beneficial to consider income protection cover:

  • If you are unable to work due to injury or sickness, an income insurance policy currently pays up to 70% of your gross income as a monthly benefit. You’ll be able to use these benefits to cover your expenses.
  • Did you know income protection cover payments are tax-deductible? This could lower your premium payments. Beware though the benefits paid to you will be assessed as part of your income and taxed.
  • There are more comprehensive policies available outside what your Super would generally offer as an income protection benefit.

Frequently asked questions & answers

  • What is income protection insurance?

    Income protection insurance in Australia is a cover designed to protect your greatest asset – your ability to earn an income. The cover will assist you and your family when you can’t work due to illness or accident.
  • What does income protection insurance cover?

    Income protection insurance generally covers you when you are unable to earn an income. The policy generally pays out 70% of your income for a certain period.
  • What are the changes to income protection insurance?

    From 1 October 2021, insurers will have rules in place to make sure benefits do not exceed 90% of your earnings for the first six months of the claim and do not exceed 70% of earnings after that, cease offering guaranteed renewable policies, and have stricter disability definitions for longer benefit periods.
  • Will the changes to income protection insurance impact doctors?

    All medical professionals, including doctors applying for a new income protection cover, will be impacted by the changes introduced from April 2021 and concluded on 1 October 2021.

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

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