Income Protection Insurance - What changed on October 1st?
The lead up to 30th September 2021 became a little manic for risk specialists such as myself. We had five times more client enquiries than any other month and had to push very hard to fulfil these requests, while still providing high quality advice. A key issue was that advisers were unsure what would happen with the release of new insurance products in October. The whispers we had suggested these products would be far inferior to those we had become comfortable with. So are the new type of contracts really that different?
There are a few major differences however how these will really work still remains to be seen. The big concern was that long term Income Protection claims would only be payable on an “Any Occupation” basis and age 65 benefit periods would be removed. It turns out that this is not actually the case for all insurers, some have come up with unique ways to manage stability that does not follow the previously published APRA guideline exactly. The final phase of APRA mandated changes come about in Oct 2022, when it’s planned that ‘Guaranteed renewable contracts’ will no longer be offered. From this point on, income and occupation can be assessed every 5 years and contract terms amended. Potentially to your detriment although you wont need to be medically assessed again. In the meantime contracts are being tweaked and modified as each insurer gets a look their competitors interpretation of APRA’s guidelines. Ultimately, nobody is printing their PDS right now, as they are being adapted and modified daily.
The big changes
Age 65 benefit periods:
All insurers have actually retained long term benefit periods such as “age 65” in at least one of their offerings. They are of course, adding details that may make this a hollow promise. These details need to be very carefully considered.
Own occupation cover:
This is the key way to manage long term claims. Initially, you would be assessed on your ability to do key duties of your job and also hours to match. After some time eg 2-5 years, many providers are opting to move to a “Suited occupation” definition. Though the term is slightly different this is essentially the “Any occupation” wording of the past. therefore the insurer would be able to assess if you were physically and mentally able to perform a job that you were reasonably suited for by education, training or experience. Does this mean that a neurosurgeon is suited to pushing a broom around a warehouse? Untested ground so far.Sick/ long service leave and other sources of income:
Previously you (or your employer) could choose to use long service leave or sick leave during or before your claim commenced. Now, many insurers are saying you must take this first, before a claim can begin. Any income from investments or your business, is also considered and may reduce your payment, where previously this was often irrelevant.
How much is covered?
Previously your “pre disability income” was simply 75% of your indemnity amount across all insurers (some threw in an extra 10% for super). Now there is a vast difference, with some offers covering up to 90% for first 6 months and then potentially dropping down to 50% on longer term claims. How this is structured is usually an optional extra.Capability clause
Every insurer bar one (PPS Mutual) has now applied a ‘capability clause’ of some sort. This clause means that if the insurer deems you medically able to return to work and be “off claim” they have the discretion to stop paying you. This is based on the opinion of your treating medical provider. Essentially this is designed to stop claimants intentionally lowering their income or hours to still meet claim requirements.
Recovery, re-education and retraining
Income protection was never designed to be a set and forget system, as you would need to show that you were attempting to recover and your treating doctor is required to sign off on your inability to work. There has been significant expansion of this wording, where insurers are looking to rehabilitate and get claimants back to work. While this certainly goes a long way to reduce costs to insurers and consequently reduce premiums. The mantra that “work is good for you” has become significantly more prevalent and insurers are working on programs such as ‘Best Doctors’, to get people back to work.
Level premium structures
With changing product types and sustainability in question, there was a lot of speculation regarding level premium structures still being offered. It does appear that a few insurers have opted for Stepped premium structures only, while others are offering both. As mentioned before we have not yet reached the October 2022 cut off. This among many other factors, may still change.
Risk advisers are now specialists
Income Protection options have never been so diverse. Up until now an adviser or broker had simply to compare a research rating usually produced by one of two providers (IRESS or Omnium) and then find the cheapest premium. Every now and then there might be a few features that were relevant to the client’s unique needs. However, ultimately this simple process was all that was required to demonstrate the advisor was working in their client’s best interest. Now there is a wide spectrum of options available to the client and the emphasis is on the adviser research the clients requirements fully and find a policy to suit those needs. This demands an excellent understanding of all risk products and how they work in conjunction with one another. Scoping advice just down to “how much insurance would you like” is increasingly risky as the adviser is bound to fulfil this duty.
The Sky didn’t fall, you can still get good cover at a reasonable price
All factors considered, I do feel like the “sky is falling” mentality insurers happily played into during the lead up to October 1st, was largely unfounded. One could almost think that there was an element of marketing involved here.
Advisers, especially risk advisers, hate unknowns. These changes were touted as the most significant changes to insurance in Australia in the last 30 years. We were warned of far weaker Income Protection contracts, at higher prices. The industry at large became incredibly nervous and clients caught on to this.
At first glance it looks like some insurers have used a combination the ‘capability clause’ or a reduction of income test, to ensure that long term claims such as age 65 are still available. However there is more wiggle room for the insurer to reduce this over time and therefore manage the cost. It is also likely in the coming months that others with amend their offerings to reflect this unique interpretation and remain competitive.
Only time will tell if this all settles down. For now we still have little certainly. Premiums could potentially keep jumping and contracts may be further modified. Nevertheless the world continues to spin. Claims continue to be paid to people who need it. No matter what happens your adviser, if you have a good one, will be standing by your side through it all.