Income Protection Changes 1 October 2021 Deadline

Russell Cain Updated: 14 October 2021

Income Protection Changes 1 October 2021 Deadline

Published September 21, 2021

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Early last year, the Australian Prudential Regulation Authority (APRA) announced some significant shakeups to income protection policies, and none of it benefits you as the customer. The deadline for these significant changes is now right on our doorstep as 1 October 2021 approaches.

By this date, most insurers will have implemented changes to their policies which mean that your income will be assessed differently, monthly benefits will be capped and the way disablement is defined will become a lot more stringent. It’s generally a good idea to review your income protection policy sooner rather than later as many insurers are putting new measures in place before APRA’s deadline.

Income Protection changes now in effect

As of 1 October 2021, income protection policies with generous features and benefits were taken off the market. APRA required insurers to change disability definitions, relook income assessments and cap monthly benefits at 70%.

The first of these measures was implemented in March 2020 when insurers were required to stop offering new Agreed Value income protection policies to consumers. Review the changes to current income protection policies to determine the pros and cons of buying a new policy versus maintaining your existing policy.

What is income protection insurance?

An income protection insurance policy typically pays a monthly benefit of up to 70% of your regular income when you’re unable to work for longer than your waiting period, due to an illness or accident. This benefit can help you maintain your lifestyle and support your family while you focus on recovery. 

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.

On 31 March 2020, new applications for Agreed Value income protection insurance were discontinued, which is particularly worrisome for self-employed people who have fluctuating incomes.

How the income protection rules will change

How will it affect you?

New income protection clients buying an income protection policy after 31 March 2020 will have their monthly benefit based on their income at claim time. New clients will not be eligible for Agreed Value policies that provided more certainty at claim time as benefits were determined during the application stage when financials were provided.

Existing Agreed Value income protection clients policy terms and conditions will generally not change, however, your premiums might change in future.

When will the changes come into effect?

Agreed Value income protection insurance is no longer available after 31 March 2020. With many life insurers moving early on the previous due date it is expected that many of the providers will start implementing the other changes earlier; however, the next planned date for changes is set for no later than 1 October 2021.

APRA has requested that life insurance companies provide data regarding the changes implemented so that they can monitor the expected results.

Why are income protection rules changing?

APRA wants insurers to improve the profitability and sustainability of income protection products, due to the heavy, ongoing losses experienced in the past five years – $3.4 billion. The changes are a means of managing the financial risk associated with the product.

Should a life insurance company fail to demonstrate sufficient and sustainable progress, APRA will impose a capital charge with the amount proportioned to each company’s gross exposure to income protection policies.

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The income protection changes explained

Below is a more in-depth description of the changes to income protection insurance:

The end of Agreed Valued policies

Agreed Value and Endorsed Agreed income protection insurance, that locked-in your monthly insurance benefit at application time, are no longer available to new applications after 31 March 2020.

However the alternative is an Indemnity income protection policy, which calculates your benefits on annual earnings at claim time and can thus be affected by any subsequent reductions in your income.  

Benefits will be based on your annual earnings of the last 12 months

From 1 October 2021, your monthly benefit payout will be calculated on what you earned during the 12 consecutive months before you got sick or injured. This change could have a significant negative effect on especially the self-employed who do not have the security of a set salary.  

Currently, select insurers provide you with the option of proving your income over the previous 2 to 3 years and then using the best 12 consecutive months of that period. There is however an exception being made for people with a variable income who will have the income at risk assessed based on the average annual earnings of a period that is appropriate for that specific occupation. However we are yet to see how this will interpreted by insurers and implemented in their policy terms and conditions.

Income protection contracts may not exceed 5 years

Another income protection change to come into effect no later than 1 October 2022*, is that yearly guaranteed renewable will be replaced with contracts that cannot be guaranteed renewable for greater than 5 years.

While it proposes that the policy owner can elect to renew their contract for further periods (not exceeding 5 years) without having to undergo a medical review, the renewal will be subject to an analysis of changes in your occupation and financial circumstances.

*The implementation of the policy term contract measure was postponed to 1 October 2022 by the regulator, after industry feedback indicated it couldn’t be delivered by the October 2021 timeline.

Source: https://www.apra.gov.au/individual-disability-income-insurance-deferral-of-implementation-of-policy-contract-term-measure

Limits on income protection payments for the first 6 months

From 1 October 2021, insurers must ensure your benefit does not exceed 90% of your earnings at claim time for the first 6 months. Life insurance companies will consider your benefit payment and any alternative sources of income you might be receiving.

After 6 months your maximum income protection benefit will be limited to 70% of your earnings at the time of claim, up to $30,000 per month.

Reducing the risk of longer benefit periods

To encourage clients to recover and return to work sooner, insurers should have controls in place, by 1 October 2021, to reduce the risk of long-term benefit periods. This means stricter disability definitions and setting internal benchmarks for new income protection products with long benefit periods.

Life insurance companies to provide quality data

From 1 October 2021, APRA  expects life insurance companies to deliver up-to-date data promptly, so results of customers experience can be released every 18 months. 

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

If you don’t yet have an income protection policy and want to avoid all these new rules, you might want to consider comparing policies from some of Australia’s major brands and apply as soon as possible.

Take note: Some companies have already stopped selling Agreed Value income protection.

Frequently asked questions and answers

  • What is income protection?

    Income protection is an insurance policy designed to replace a portion of your income, typically up to 70%, for a time when you are unable to work due to injury, illness or accident. The cover could be especially valuable to the self-employed or small business owners who may not be covered by general workers compensation agreements.
  • What alternatives do I have for protecting my income?

    Some employees can include income protection as part of their super benefits through work, but these policies generally are more basic than specific income protection cover.
  • What are the changes to income protection?

    When the main income protection changes come into effect on 1 October 2021, there will be no more guaranteed renewable policies on offer; benefits can’t exceed 90% of your income for the first six months and can’t exceed 70% of earnings after that. Stricter disability definitions will be in place for longer benefit periods.

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