Changes to Income Protection insurance

From 1 October 2021, there will be considerable changes to Income Protection insurance. 

These changes will only apply to new Income Protection policies put into force after 1 October 2021. If you and your family require continuation of your income in the event you got sick or injured and couldn’t work, you should speak to an adviser about implementing Income Protection insurance before the changes take effect.

Background

Due to increasing claims, insurers have experienced losses of over $3.4 billion on Income Protection policies over the past five years. The Australian Prudential Regulation Authority (APRA) wants to improve the sustainability of Income Protection insurance products to ensure the cover remains affordable for individuals over the long term. Hence, changes to Income Protection insurance are necessary.

What’s changing

• A reduction to the amount that the insured may be paid upon a claim.
• Stricter definitions reducing the likelihood of the insured remaining on claim beyond 2 years.

Currently, Income Protection policies replace 75% of your income if you can’t work due to an illness or injury, usually through to age 65. From 1 October 2021, Income Protection benefits are limited to a maximum of 90% income replacement for the first 6 months, reducing to 60% or 70% for the remainder of the policy, resulting in a lower ongoing benefit. The percentage of income covered after the first 6 months varies across insurance providers, so financial advice from a licensed financial adviser is imperative to ensure you implement a policy that best suits your needs.

Currently, Income Protection insurance will pay a monthly benefit to the insured if they can’t work in their own occupation. For example, if a plumber has a back injury and can’t do all or some of his duties as a plumber, he may be eligible to claim. From 1 October 2021, a person on an Income Protection claim for more than two years may be forced to return to work in any occupation suited to them by education, training, or experience. For example, if a plumber still has a back injury after two years and can’t do his duties as a plumber, but he can work as a salesman, he will not be able to continue to claim on his Income Protection policy and may be forced to take up employment.

Other changes are coming into force from 1 October 2021, however, the two most impactful changes are those mentioned above, and we recommend you speak to a licensed financial adviser to find out more.

Who should get in quick

Income Protection insurance will be less generous from 1 October 2021. The key message is that if you need Income Protection insurance, you should consider implementing a policy before 1 October 2021.

For further information

Please contact your financial adviser to discuss how the income protection changes may impact you or get in touch with your local RSM office for further information. 

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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