Guide to APRA’s Income Protection Changes as of 1 October 2021

Russell Cain Updated: 19 September 2023

Income Protection Changes 1 October 2021 Deadline

Published August 21, 2023

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For many people, income protection has always been a crucial means of financial security. It helps to safeguard their earnings during times of unexpected illness or injury. Recently, however, the landscape of this protective service has undergone significant changes. One of the key drivers of this evolution is the Australian Prudential Regulation Authority (APRA). This organisation has taken proactive steps to strengthen the industry’s sustainability and usher in a new era of income protection. 

While these changes are intended to ensure the sector’s longevity, they also have important implications for policyholders. As a result, individuals need to gain a deeper understanding of these changes and navigate this new terrain strategically.

Context of Income Protection Changes

The insurers that offer income protection products have undergone significant changes in recent times due to the challenges faced by the industry. High claim rates and financial strains have raised concerns about the sector’s future. The Australian Prudential Regulation Authority (APRA) recognised these potential risks and introduced sustainability measures to stabilise the industry.

These measures aim to ensure that Retail income protection policies remain beneficial for consumers and financially sustainable for providers. In March 2020, Agreed Value policies were discontinued, a precursor to a series of reforms. The reforms aim to balance policyholder benefits with insurer sustainability.

Breakdown of APRA’s Changes

  1. Replacement Ratios:
    • Pre 1 October 2021: Policyholders could secure up to 75% of their personal exertion income.
    • Post 1 October 2021: The replacement ratio has been adjusted o maximum of up to 90% for the first 6 months, followed by up to 70%. After 2 years, select providers reduce this further to  60%.
  2. Maximum Sum Insured:
    • Pre 1 October 2021: The maximum monthly benefit was $60K.
    • Post 1 October 2021: This has been typically halved to a $30K monthly benefit. However, it’s worth noting that select insurers still offer the $60K monthly benefit. Policyholders should refer to their Product Disclosure Statement (PDS) to determine if it applies.
  3. Total Disablement Definitions:
    • Pre 1 October 2021: The “Own occupation” definition typically applied for the entire claim period. Some insurers offered 3-tier definitions based on hours, duties, or income.
    • Post 1 October 2021: The “Own occupation” definition generally applies for the first 2-5 years of a claim. After this period, the “Any occupation” definition takes precedence. This new approach focuses on a single-tier definition, emphasising on all important income-producing duties. Additionally, participation in reasonable retraining or rehabilitation might be required. 
  4. Income at Risk Calculations:
    • Pre 1 October 2021: Various definitions were used across the market, with some insurers considering the best 12 consecutive months in the 36 months before disablement.
    • Post 1 October 2021: The focus has shifted to income earned when making a claim, which should be at most 12 months old. For those with fluctuating incomes, the average earnings over an appropriate period will be considered.
  5. Capacity to Work:
    • Pre 1 October 2021: This was primarily part of the calculation for partial disability benefits.
    • Post 1 October 2021: It now plays a role in calculating total and partial disability benefits.
  6. Ongoing Income and Paid Leave:
    • Pre 1 October 2021: Ongoing income and paid leave were not always offset.
    • Post 1 October 2021: They are offset from the first day of paid leave.
  7. Superlinking:
    • Pre 1 October 2021: This feature was available.
    • Post 1 October 2021: It’s generally not available.
  8. Severity Booster Option:
    • Pre 1 October 2021: This option was typically not offered .
    • Post 1 October 2021: A new option has been introduced, allowing an additional 20% to be paid in the first 6 months for severe trauma events and hospitalisation.

What to Look Out for in Post-October 2021 Policies

Understanding income protection policies has become more complex since the changes made in October 2021. Whether you are a new or existing policyholder, it is important to know the adjustments and details in the available offerings. This guide covers the essential elements to remember when assessing or reviewing policies implemented after October 2021.

Updated Monthly Benefits Structure

In the past, if you had a Retail income protection policy, it was typical to receive coverage for up to 75% of your gross monthly income. Some insurers even allowed you to increase this coverage to 80%, ensuring you had enough funds to manage your expenses when you couldn’t work. However, as of October 1, 2021, there has been a change in this policy.

Insurers are now required to limit income protection benefits to 70% of your earnings at the time of claim submission. There is an exception where up to 90% can be offered, but only for the first six months. Additionally, most insurers have reduced the maximum monthly benefit from $60,000 to $30,000, which is an important change to be aware of.

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Revised Disablement Definitions

Before the changes in October 2021, income protection policies typically followed the “Own-Occupation” definition, valid until age 65 or for the entire benefit period. This definition implied that if a medical professional declared you unable to work due to sickness or injury after the waiting period, you could usually file a complete claim if you couldn’t perform any of the essential income-generating duties related to your occupation.

Since the changes, insurers typically change to  the “Any-occupation” definition after the first two years of a claim, (However if you have elected a 5 year benefit period select insurers will now allow you to retain this “Own Occupation” definition for up to 5 years). This updated definition allows insurers to stop your benefits if they believe you can perform any job that matches your educational background, training, or prior experience. To be considered fully disabled under this new definition, you must prove that you cannot perform all tasks related to any job that aligns with your skills, education, and professional background.

Income calculations changed

APRA has introduced an important change regarding how your income is calculated when you make a claim. If you had an income protection policy before the reforms, certain insurers would assess your income based on the highest-earning 12 consecutive months over a 2 or 3-year period. This benefited those with a variable income as their benefits were calculated according to their highest-earning period. If you apply for a new policy today, your income will be calculated at the time of your claim but generally based on your income earned in the 12 months prior. If your income fluctuates, some insurers may consider your average earnings over 2 years. For information on calculating your income at risk, please refer to your Product Disclosure Statement (PDS).

Recommendations for policyholders

Policyholders must be proactive and informed in light of the recent changes to income protection policies. Here are some recommendations to help navigate this evolving landscape:

  1. Review Your Current Policy: Take the time to thoroughly review your existing policy, especially if it was purchased before the October 2021 changes. Understand the terms, conditions, and benefits to determine if it still meets your needs.
  2. Consult with a life insurance specialist (like us): Given the complexity of these changes, seeking assistance from an insurance specialist can provide clarity. To help you navigate comparing the “Older” style policies vs the “New” ones.
  3. Stay Updated: The insurance industry is dynamic, frequently changing regulations and offerings. Regularly check for updates from your insurer and APRA to stay informed about further modifications.
  4. Consider Supplementary Insurance: With the changes in income protection policies, it might be worth exploring other insurance options, such as trauma or TPD insurance, to ensure comprehensive coverage.
  5. Evaluate Your Financial Safety Net: Beyond insurance, consider other financial safety measures like emergency funds, investments, or savings accounts. These can provide additional support in case of unexpected income disruptions.
  6. Reassess Your Coverage Needs: Life events such as marriage, purchasing a home, or having children can alter your financial responsibilities. Regularly reassess your coverage needs to ensure your policy remains relevant.
  7. Understand the Definitions: Familiarise yourself with terms like “Own Occupation” and “Any Occupation” to understand how potential claims might be assessed under the new guidelines.
  8. Check Maximum Benefit Limits: With the cap on monthly benefits reduced for many insurers, ensure you know your policy’s maximum payout and how it aligns with your financial obligations.
  9. Read the Fine Print: Always read any insurance product’s Product Disclosure Statement (PDS). It contains vital details about the policy, including exclusions, waiting periods, and benefit durations.
  10. Stay Healthy and Safe: While insurance provides a safety net, prioritising your health and well-being is paramount. Regular check-ups, a balanced lifestyle, and adhering to safety guidelines in your profession can reduce the risk of claims.

Future Implications of the Changes

Recent changes by APRA regarding income protection policies have highlighted the importance of trauma and Total and Permanent Disability (TPD) insurance. As income protection benefits become more limited, policies offering lump-sum payments for severe illnesses or disabilities have become crucial safety nets. If you’re considering switching policies, analysing the advantages and disadvantages is vital. While newer policies may have lower premiums, they may also have stricter terms, especially when defining disability.

The shift from “Own Occupation” to “Any Occupation” in income protection has significant implications for the future of TPD insurance. In the past, “Own Occupation” TPD policies were preferred as they catered to specific professions. However, with the changing landscape, insurers may re-evaluate the terms or premiums of these policies. As the industry evolves, individuals must stay informed and adaptable when navigating this changing environment.

The Outlook for Income Protection

The decision to intervene in the income protection landscape was not taken lightly. From their perspective, income was crucial for ensuring the long-term sustainability of the insurance sector. Their main aim is to strike a balance where insurers can offer useful protection to consumers while maintaining financial stability. This proactive approach aims to prevent a potential crisis in decision-making, which could have far-reaching consequences for policyholders.

Frequently Asked Questions and Answers

  • What prompted the changes to income protection policies in October 2021?

    In October 2021,Retail Income Protection policies were modified due to concerns about their sustainability. The Australian Prudential Regulation Authority (APRA) noted that the policies offered generous terms and conditions, which led to high claim rates, risking the industry’s viability. APRA implemented a series of reforms balancing both parties’ needs to ensure long-term stability and valuable consumer protection.
  • How do the new changes affect existing policyholders?

    For you as an existing policyholder, the impact of the new changes largely depends on the terms of your current policy and when it was taken out. If you purchased your policy before the October 2021 changes, it will generally retain its original terms and conditions. However, if you decide to make significant amendments to your policy or wish to purchase a new one, you will typically be subject to the new terms set post-October 2021. You must review your current policy, understand any potential implications, and consult with your insurance provider or life insurance broker to get clarity on your situation.
  • What is the difference between “Own Occupation” and “Any Occupation” in the context of the new changes?

    These terms refer to the definitions used to determine eligibility for disability claims. “Own Occupation” means that a policyholder can claim benefits if they cannot perform the duties specific to their profession or job role due to illness or injury. “Any Occupation” is broader and requires the policyholder to be unable to perform the duties of any job they are qualified for by education, training, or experience to be eligible for benefits. Recently, policies have shifted from predominantly offering “Own Occupation” definitions to those that apply “Any Occupation” definitions after the first two years of a claim period.
  • Are there any anticipated future changes to income protection policies?

    Although the October 2021 reforms significantly impacted the insurance industry constantly evolves. Changes may occur due to factors such as economic conditions, claim patterns, and regulatory observations. Regulatory bodies like APRA continuously check the industry’s health and may introduce further reforms if necessary. If you are a policyholder or considering buying income protection, it is important to stay informed and frequently check for updates from both your insurer and regulatory authorities.
  • Is it still worth getting income protection insurance after these changes?

    Although the terms and conditions of income protection policies have changed, the main purpose of this type of insurance remains the same. It serves as a safety net, providing a source of income in case of illness or injury that prevents individuals from working. The industry changes aim to make it more sustainable in the long run, which benefits policyholders. If you are considering income protection, assessing your needs, understanding the new policy terms, and consulting with a financial advisor to make informed decisions is important. The peace of mind that comes with knowing your income is protected in unforeseen circumstances is priceless.

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