Income Protection Facing Massive Shake Up

28/01/2020 12:00am

An overhaul of Income Protection insurance has been proposed, to stem the billions of dollars being lost by insurers each year and it could have enormous implications for anyone considering a policy.

Some of the mooted changes could come into effect as soon as April 2020 and would have an impact on  all new Income Protection (IP) Insurance contracts, and potentially on any changes being made to existing contracts.

This type of insurance, also known as Disability Income Insurance (DII), can provide replacement income to policy holders if illness or injury render them unable to work.

“As it currently stands, it can protect a family financially in the event of debilitating injury or illness, providing a replacement income of up to 85 percent and allowing time for recovery without the added stress of mounting bills,” said Mark Mullins, Associate Director and Representative of Hood Sweeney Securities Pty Ltd, AFSL No. 220897.

Mr Mullins said one of the most radical proposed changes would restrict the benefit payment period to a maximum of five years - from the existing benefit period up to age 65.

“After five years, where would an income come from for people still recovering from an injury or illness? How would they pay a mortgage, school their children, or put food on the table?”

The Australian Government’s statutory authority, the Australian Prudential Regulation Authority (APRA) set a deadline for life insurers to commence a range of steps, including formulating a strategy to address the issues identified by the review, and reviewing income protection insurance product design and pricing practices to enhance its sustainability.

Some of the potential changes may include the following:

Current Income Protection Contracts

Proposed Income Protection Changes

Income based at time of application or time of claim

Income based at time of claim only

Benefit period up to age 65

Benefit period restricted to five years

Up to 85% of Income insured

Maximum 75% of income insured

Guaranteed Renewable contract

Initial contract term not exceeding five years (with option to extend based on contract at the time of extension)

APRA wrote to the industry in May 2019 requesting action to address the problems. Since then, insurers have reported further losses of $1 billion, prompting APRA to escalate its response.The review comes amid APRA’s concerns about what it cites as ‘lenient’ IP Insurance sold to individuals. The industry has collectively lost more than $3 billion through this product offering over the past five years, with no signs of improvement.

With at least one major reinsurer indicating it was no longer prepared to reinsure individual IP insurance, APRA Executive Board Member Geoff Summerhayes said there is now a genuine risk insurers may start withdrawing from the market.

"Disability Income Insurance plays a vital role in providing replacement income to policyholders when they are unable to work due to illness or injury," Mr Summerhayes said. 

“In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work.

"Insurers know what the problems are, but the fear of first-mover disadvantage has proven to be an insurmountable barrier to them making the necessary changes. By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with DII and to address unsustainable product design features – or face additional financial penalties."

If you are considering an Income Protection policy to protect your most valuable asset, your income, or if your current policy needs a review, ring Mark Mullins* or Hannah Waller* on 1300 764 200 and together we can explore your needs.

See more information on APRA’s proposed changes here.

 

*RepresentativeS of Hood Sweeney Securities Pty Ltd, AFSL No. 220897.

The information in this article contains general advice and is provided by Hood Sweeney Securities Pty Ltd, AFSL No 220897. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article.

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