Significant changes to Income Protection Insurance


There’s an imminent and unprecedented change approaching Income Protection Insurance that is likely to take effect from March 31st, 2020.

Disability Income Insurance (commonly called Income Protection) in Australia recorded a $1 Billion dollar loss in the first 9 months of 2019 which pushes total losses over the last 5 years to $3.4 Billion.

Late in 2019 the Australian Prudential Regulation Authority (APRA) stepped in and have proposed the following changes (among others) that will have a significant impact for those that don’t have their income protection in order before this date:

  • ensuring income protection benefits do not exceed the policyholder’s income at the time of claim, effectively ceasing the sale of Agreed Value policies; and

  • avoiding offering income protection policies with fixed terms and conditions of more than five years.

What does this mean for current and future policy holders?

Whilst this is still in consultation phase, from the information at hand, we see the following implications:

Agreed Value Income Protection

Any payment in the event of a claim would be limited to 75% of your income in a 12 month period at the time of claim, or your insured value, whichever is higher.

Sounds simple but if you are either newly self employed, recently returned from maternity or unpaid leave, or suffered a low income year for whatever reason the amount payable could be 75% of far less than you should actually be earning or what you are really “worth”.

If you have a good quality agreed value income protection policy in place you likely provided financial information at time of application. The insurer would then “endorse” your insured value so when or if you make a claim there is no financial information required, just a medical professional signing off that you can not work and the claim is made.

This is especially prevalent in the case of small business where books seem to fall on the wayside and tax returns and financial can be 2-3 years behind.  Laying in a hospital bed trying to arrange your last 2 years tax returns to be completed is not an ideal scenario.

Guaranteed Renewable contracts

Any good insurance policy will offer a guaranteed renewable contract. This means that the insurer may not change the contract to your detriment as long as you continue paying the premium.  Some even offer “auto upgrades” to new definitions etc. In practice, this means that if your health or occupation was to change after policy commencement, the insurer must continue to provide cover on the same or better terms as originally agreed.  Under the new rules you would need to alter or renegotiate your contract at least every 5 years potentially losing valuable insurance benefits when you need them most.

Which legal professionals may be most affected?

– Self-employed solicitors or barristers or those looking to start their own private practice

– Lawyers in post graduate study

– Junior lawyers

– Future parents potentially taking time away from the workforce

– Those on or considering long a sabbatical or other long term leave

What can you do?

While we are still to see the final detail, if these changes happen as proposed, it is very likely that any contract “in force” before March 31st will stand. If you have been considering maybe reviewing or establishing good cover, do it now not later as this does take time to apply for and establish.