Changes to insurance premiums and income protection policies explained

You may have noticed an increase in the cost of your insurance cover when looking at your latest superannuation statement or insurance renewal notice.

In addition to increasing insurance premiums, there are also a number of major changes to income protection policies.

We’ve outlined these changes below to help you understand what this means for you as a policyholder.

Why are insurance premiums increasing?

Insurers are seeing an increase in both the number of claims they are receiving and the duration, which is increasing their costs.

The latest quarterly life insurance statistics publication from the Australian Prudential Regulation Authority (APRA) revealed that personal risk products reported a $1.4 billion after-tax loss from June 2019 to June 2020.

As part of the banking royal commission, the insurance industry was required to review their individual policies and premiums, which resulted in the following findings:

• Almost all major insurers recorded significant losses on their income protection products in each of the past five years
• Insurers used profits from their life insurance products to offset losses on their income protection products
• The current low interest rates are putting pressure on insurers that rely on returns from defensive investments to help fund their ongoing costs, including life, TPD, trauma, and income protection claims.

What are the changes to income protection policies?

From October 1, 2021, life insurers will offer significantly less generous income protection policies to consumers.

The key changes are:

• The discontinuation of agreed value policies, which came in force from March 31, 2020
• Insurers ceasing to offer guaranteed renewable policies for the life of the policy, with a maximum contract period being limited to five years
• Limitations on the income replacement ratio available, with a maximum income replacement payment being limited to 90 per cent during the first six months and 70 per cent thereafter.
• Limitations on how ‘income at the time of claim’ is defined, with the insured income based on your annual income at the time you make a claim. Any income earned more than 12 months prior to the date of claim will not be considered.

‘Agreed value’ income protection cover is no longer available

The nature of ‘agreed value’ income protection products has meant that some policyholders could be paid more through income protection than by their employer, reducing the incentive to return to work.

One of APRA’s new requirements is that insurers must cease selling agreed value products, and instead determine benefits to the claimant’s income when they claim.

What does this mean for insurance policyholders?

Existing insurance policyholders are not impacted by these changes.

New or prospective policyholders should consider putting income protection in place prior to October 1, 2021 to ensure their policy falls under the current, more generous arrangements.

As a result of the new changes, we recommend that anyone looking to obtain income protection insurance prioritises getting the appropriate cover sooner rather than later.

The key benefits include:

• Protection of your most valuable asset – your ability to earn an income
• Income protection cover is tax deductible, which will effectively reduce the total cost of protection
• Where household cashflow is an issue, insurance can be structured to ensure a majority of the cost can be paid via your superannuation while retaining almost all of the benefits of a personally held policy.

Seek expert advice on your insurance policy

If you want to ensure that you and your family will be financially secure if illness or injury strikes, or if you would like to review your existing insurance cover or needs, LDB’s financial planners can help.

To find out more, call us on (03) 9875 2900 or fill out the contact form below.