Income Protection #3 – Nothing Lasts Forever

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Income Protection

Changes are happening to income protection insurance. In recent weeks we have discussed two major changes happening in the income protection world. This week, we discuss the third change, which affects the duration of an existing policy.

Income Protection Insurance – a Recap of our Recent Recaps

As we wrote a couple of weeks ago, income protection (‘IP’) insurance allows you to protect your personal income if you become sick or injured and cannot keep working as a result. It addresses the loss of personal exertion income. If you or someone else would suffer financially if you are unable to keep working, you should strongly consider IP insurance. Premiums are often tax deductible, so it is important to arrange type of insurance properly.

If you do not have IP, or you think your IP needs a review, please contact us immediately.

APRA’s Review of Income Protection Insurance

The main regulator of risk insurance is the Australian Prudential Regulation Authority (‘APRA’). Over the last couple of years, APRA has reviewed the way in which IP insurance is provided by insurers. The review has been largely in response to changes in how people work and how they sometimes become injured or ill.

APRA’s review has led to a number of changes which were recently discussed and summarised in a letter from APRA to life insurers on September 30 2020.

Change #3 – How Long the Policy Lasts Without Being Reviewed

An initial income protection insurance policy sets out all of the terms and conditions for that policy. Traditionally, those initial terms and conditions then stayed in place for as long as the policy continued. Policies could continue largely unchanged from the time they were established until the policy holder retired – as long as the policy holder continued to pay the premiums. So, for example, a person aged 25 could take out an IP policy with terms and conditions that might last thirty or forty years – as long as that person kept paying their annual premium.

This practice is known as ‘guaranteed renewability.’ As long as the policy holder paid the premium, they were guaranteed a renewal of the policy using the original terms and conditions.

This will alter – to some extent – due to changes announced in APRA’s September 30 letter. Once these changes take effect, new policies will only be renewable on the initial terms for a period of up to five years. At the five-year mark, a new policy will effectively need to be created. That new policy can incorporate changes to the insured person’s personal circumstances (for example, a move from full time to part time work, or vice versa, or a change in personal financial circumstances). The new policy can also bring in new definitions of insured events.

Very importantly, however, the new policy cannot adjust for changes to a person’s health since the previous policy was established. This is a very important element of insurance, as many illnesses take time to get to the point where a person is unable to work. It would be entirely unfair if an insurer could adjust or decline a renewed policy based on information that has come to light since the original policy was taken out. In fact, it would largely negate the need for insurance.

Accordingly, once this change takes effect, that part of a policy that relates to health will continue to be guaranteed renewable. The other parts of a policy can be reviewed and revised when the five-year period expires.

Timing of These Changes

The key date for the change described above is 1 October 2021.

Please note that the suggested changes will not apply retrospectively. Existing policies with current conditions remain in place.

As we said last week, it goes without saying that changing IP policies at the moment should only be done with the utmost care. Similarly, if you are looking for a new policy, then timing the commencement of that policy is also crucial. So, if you or someone you know is contemplating new or changed IP insurance, please do not hesitate to get in touch.

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