Changes to government regulations are now in place that will reduce the benefits available on new income protection policies from 1 October 2021.
Income protection insurance is an important part of financial planning for many clients of working age as it pays a monthly benefit when you’re unable to work due to an unexpected illness or accident. This benefit enables you maintain your lifestyle and support your family while you focus on your recovery and has been invaluable to countless clients over the years.
The Australian Prudential Regulation Authority (APRA) has mandated the changes, which are aimed at improving the profitability of income protection products after the insurance industry experienced losses of $3.4 billion from related products in the last five years.
Unfortunately, what is in the best interest of the insurance companies, often means a worse deal for consumers. If you currently have a comprehensive policy, or can get one in place by 1 October 2021, it will include a number of supplementary (and potentially valuable) benefits.
From October 2021, however, these extra benefits will not be available on new polices, due to the changes mandated by APRA:
- Income replacement ratios to be reduced to 70%, from 75% currently.
- Other benefits in the first six months of a claim to be restricted to an additional 20%, i.e. a limit of 90% overall. This compares to current policies offering a range of supplementary benefits which can double this.
- Income to be calculated on last 12 months income only, compared to some current policies offering highest 12 months income in the last 2 or 3 years.
- Long benefit periods, such as to age 65, to be managed to maintain a motivation to return to work.
There is also the likelihood that by October 2022, policies to be guaranteed renewable for no longer than 5 years, compared to age 65 for current policies.
Very few insurance companies have released details of the products they will be selling after October 2021. However, our concern is that if clients wait for these products to be released it might be too late to sign onto the current policies with the additional benefits still on offer.
If you are considering a new income protection policy or know a friend or family member who would benefit from advice about these products, please contact your FMD adviser.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.