Income Protection Insurance: What has changed?
Income Protection insurance pays a monthly benefit during your benefit period if you cannot work due to sickness or injury, helping you support yourself, your family and cover essential living expenses.
If you currently have Income Protection insurance and are thinking of switching or are in the process of considering taking out cover, you may have heard that there have been some changes to the features and benefits now being offered.
Why is Income Protection changing?
In late 2019 the Australian Prudential Regulation Authority (APRA) identified that Income Protection products (also known as Individual Disability Income Insurance (IDII)) being offered by life insurers had resulted in the industry losing around $3.4 billion over five years. Such large losses posed a real threat to the product’s long-term viability in Australia.
One of APRA’s concerns was that life insurance companies, when faced with higher-than-expected claim costs, leading to financial losses, often increased their premiums substantially. This approach resulted in cover becoming unaffordable for some customers and unsustainable over the long-term.
To deliver better outcomes for customers, APRA advised all life insurance companies that from 1 October 2021, a number of changes including the following were to be implemented:
- Ensure benefits do not exceed the policyholder’s income at the time of claim.
- Ensure effective controls are in place to manage the risks associated with longer benefit periods (e.g. policies paying benefits for any length of period up to age 65).
APRA also required life companies to stop issuing ‘agreed value’ income protection cover, from 1 April 2020.
In addition to these measures, APRA expects that life companies now need to design and manage Income Protection products with the objective of:
- Better meeting the needs of consumers, with clear and objective criteria for claims eligibility.
- Providing policyholders with improved certainty of coverage and premium stability.
- Being financially viable over the long term.
As a result of these measures, life companies developed innovative solutions to meet the new regulatory expectations, whilst still meeting the needs of their customers.
What has been the impact of these changes for customers?
As a result of these developments, there is now greater variation in Income Protection insurance products available. With the increased options, there is also greater variability in the cost of insurance for customers. Given the choices available, customers may now find it more difficult to choose the best option for them.
These latest changes don’t impact customers that purchased an Income Protection policy prior to 1 October 2021. However, if you already have cover in place, you may wish to review your insurance cover in future given the changes in Income Protection insurance products now available. However, care is needed in considering whether a newer product meets your needs – people may find their existing product is preferable for them.
Some of the major changes to Income Protection policies include the following:
- Insurers have developed different product features and terms and conditions to better manage the risk of longer benefit periods.
- Some of the benefits and features previously available have been replaced, reduced, or removed, to ensure income protection benefits do not exceed the insured person’s pre-disability income.
Overview of Key Features and Benefits
Following is a summary of the main features of Income Protection cover available from 1 October 2021 (note: these may vary depending on the life insurer).
Indemnity Value vs Agreed Value
All Income Protection products now offer Indemnity Value cover and provide a monthly benefit based on a percentage of your Income as at the time you make a claim.
Since 1 April 2020, insurers can only offer Indemnity Value policies to new customers. If you purchased an Agreed Value policy (that is, one where the amount you’re insured for is a percentage of an agreed amount when you take out the cover) before this date, you can continue to hold this policy. If you decide to purchase a new Income Protection insurance policy, you will only be able to purchase an Indemnity Value policy.
Monthly benefits are payable after a waiting period if sickness or injury means you need to stop working. Benefits are payable for the benefit period that applies to your cover, and are only payable whilst you are unable to work (or in the case of benefits for partial disability, generally speaking whilst you are able to perform only limited work or duties and suffer a reduction in earnings beyond a certain threshold). You will be assessed on your inability to perform work duties. The criteria of this assessment will vary between insurers and may change after a certain period of time ‘on claim’, and generally speaking these may include:
- Your ability to perform all or some of the duties of your ‘own occupation’.
- Your ability to perform all or some of the duties of ‘any occupation’ for which you are suited or capable of performing, based on your education, training, or experience.
- Additional assessments after being ‘on claim’ for 24 months.
Percentage of income you can insure
The maximum amount of income that you can insure will range from 60% upwards (depending on the insurer and the product they are offering), over different benefit periods, e.g. 6 months, 2 years or a longer term, depending on the product. Most products tend to offer a number of benefit periods. A sliding scale may also be applied – for example, higher portions of someone’s income may only be insurable at a reduced percentage. You can also choose to insurer a lower amount, depending on your personal needs. Income protection products can be quite detailed so it’s always important to carefully read the PDS to help you understand the extent and limitations of your cover and what you will be paid during your benefit period whilst you are unable to work.
If your insurable Income has reduced since you bought your policy this is likely to mean the monthly benefit you receive in the event of a claim could be less than the benefit you would receive based on your original sum insured. Alternatively, if your insurable Income has increased and you have not updated your sum insured to reflect this, the monthly benefit you receive in the event of a claim will not reflect the increase to your insurable Income.
So it is important to regularly review the suitability of your sum insured and contact your insurer to apply to amend this if required.
You will typically have a choice of waiting periods before a benefit is paid – for example, with NobleOak’s income protection cover (which is called Disability Income Insurance), waiting periods of 30 or 90 days are available.
These can also vary with some insurers offering a benefit period of 2 years, 5 years or up to age 65. This provides policyholders with the option to combine a short-term benefit period (i.e. 2 years or 5 years) with TPD cover as (depending on their needs and circumstances) this may be more cost effective than selecting a longer benefit period such as to age 65 for income protection.
Some insurers provide protection against inflation with the sum insured being increased automatically, usually reflecting movements in the CPI. This also increases the premium payable. In addition, there may be further inflation protection whilst on claim with the benefit amount paid increasing if the CPI increases.
NobleOak Disability Income Cover
Disability Income Insurance, more commonly known as Income Protection, is an important consideration for many Australians who want to protect the ability to receive an income if they’re sick or injured and can’t work. In addition to the core aspects of Income Protection shown above, NobleOak Disability Income Insurance offers additional benefits designed to help support your recovery and return to work should you be unable to work due to sickness or injury. You also have the option to insured a superannuation component (for which an additional premium amount would be payable).
Recovery at Work benefit:
This is a payment to assist with the cost of buying special equipment designed to help you re-enter the workforce, or to modify your workplace. It may also include an amount for support programs to assist in returning to work. This is in addition to the monthly benefit paid.
Rehabilitation Program Expenses benefit:
Assistance with meeting the costs of participating in a rehabilitation program recommended by a treating medical practitioner.
Vocational Transition Program benefit:
Assistance to help cover vocational re-training costs to assist in transition to an occupation for which you have or are likely to have ability when you are unable to return to your regular occupation.
Waiver of Premium while on claim:
Your premiums will be waived on your Disability Income Insurance cover whilst you are On Claim.
Cover Suspension (Premium Pause):
This feature is available if you have had cover in place for at least 2 years and need to take extended leave from employment or become unemployed. You can apply to suspend your cover (and premium payments) for up to 12 months . You will not be able to make a claim whilst your cover is suspended.
Monthly Super benefit:
A monthly superannuation benefit will be paid on your behalf direct to your complying super fund if you are Totally Disabled or Partially Disabled and receiving a Monthly Benefit for Disability. This benefit is an optional extra.
Personalised claims service:
NobleOak provides a personalised claims service with dedicated case managers to help support you through your recovery.
If you’re thinking of taking out Income Protection cover and would like more information on what NobleOak offers, please call us on 1300 041 494 or click here to get a quote. You should read the PDS for the product, which provides more detail on the benefits, features, limitations and exclusions discussed in this blog.
Important information – The Target Market Determinations for NobleOak’s Life Insurance products are available on our website at https://www.nobleoak.com.au/target-market-determination/ . Cover is issued by NobleOak Life Limited ABN 85 087 648 708 AFSL No. 247302. Address: 66 Clarence Street, Sydney NSW 2000. Phone: 1300 108 490. Email: [email protected].