Income Protection Changes: What you need to know
For many clients, income protection (IP) insurance is an important safeguard to protect their ability to earn an income in the event of disability, sickness, or injury. The upcoming APRA Income Protection changes come into play from October 2021, aiming to address some of the design flaws with the current breed of income protection policies. These changes will greatly affect many clients who are looking to make changes to their existing cover.
Rudy Haddad, Head of Practice Management & Technical Advice Delivery at Wealth Market, sat down to chat with Jason Hugo, Wealth Market Financial Adviser, to discuss the guideline changes and what they mean for advisers and clients.
Jason, you have looked after a lot of clients over your career. Have you ever been able to help someone make a claim on their income protection policy?
Jason: Unfortunately I have had a lot of income protection claims, particularly clients who were suffering cancer. One of my first claims was a client with a young family who was diagnosed with Breast Cancer. She was unable to work for about 10 months during treatment and then she eased back in the workforce part-time over the following 12 months. She has said to me many times that without the insurance, they would have lost their home.
Tell us how income protection works?
Jason: Income protection provides up to 75% of your income on a monthly basis if you’re unable to work due to injury or illness and your income has stopped (or reduced). Essentially, Income Protection is like paid sick leave to assist with paying your bills & mortgage.
Depending on the policy chosen, income protection can continue paying a monthly benefit up to age 65.
The good thing is that it is not an ‘all or nothing’ policy, so with the example of my client returning to work on a part-time basis, the policy provided a ‘top-up’ to her income up to the 75% level.
There are some changes on the horizon for income protection contracts in October 2021, can you tell us what they are?
Jason: APRA has issued a number of guidelines for insurers for all new income protection policies from October this year onwards. So, if you get a new policy before then you can still take advantage of the current policies - which offer more generous terms. The new guidelines aim to address some of the design flaws with the current breed of income protection policies - which has been deterring claimants from returning to work they are capable of doing.
Whilst we are still waiting for insurers to release their new policies, based on APRA guideless we are expecting;
- Stricter definitions which may make it harder, in some instances, to remain on a long-term claim
- Reduction in the income replacement ratio which may result in a lower monthly benefit. This may drop to say 60% for example, whereas now it's 75% of your wage. In specific terms this means that if you earn $1,000 per week now, you can protect up to $750 under the current regime. Once the changes kick in you may only be able to protect $600!
So our advice to anyone considering income protection is to apply now, because with a ‘guaranteed renewable’ policy, the current features & benefits are locked in for the life of the policy.
Thank you so much for what you and the Wealth Market advisers do for clients. You and the brokers are a dream team - brokers allow clients to realise their property dreams and advisers protect those important assets. Keep up the great work!