Australians weighing up income protection insurance are being told to get in sooner rather than later before major changes on October 1.
Income protection insurance pays policy holders a significant portion of their income when they are unable to work due to injury or poor health.
But from October 1, insurers will be required to offer less generous benefits to customers in an attempt to safeguard an industry that has suffered billions of dollars in losses in just five years.
Here’s what you need to know.
Risky job, higher premiums
As it stands, workers with income protection policies do not need to inform their insurer if they change jobs.
Integral Private Wealth principal David Simon said this means if you signed onto an insurance policy in the past, it will remain in force even if you moved into a more dangerous occupation.
“You could give up a low-risk administration job and become a police officer and the policy would remain in force in its current form,” Mr Simon said.
But that’s set to change.
From October, if you take up a more dangerous job you will need to inform your insurer.
As a result, they will either charge you a higher premium or refuse to cover you.
Also, regardless of whether you change jobs, policies signed after October 1 will only last five years before needing to be renewed.
That means the insurer will be able to increase the costs or reduce the coverage whenever a policy expires.
Current rules allow insurers to cover up to 75 per cent of your current income, and up to 85 per cent if you include superannuation contributions.
But from October 1 this will fall to 70 per cent in most cases.
You will be able to claim a maximum of 90 per cent of your pre-injury income for the first six months, and then only 70 per cent after that.
New rules for assessing pre-injury income could also reduce your payout.
“The income you are insured for is going to be based on your income in the 12 months leading up to the claim, rather than over three years as it is currently,” Finder insurance specialist Taylor Blackburn said.
“If you were an artist and you had a big payout a year and a half ago, then that would not be taken into account under the new arrangements.”
Stricter payouts and age limits
Up until now, policy holders have been able to make a claim when an injury prevented them from doing their old job.
From October, they will only be able to make a claim if their injury or illness prevents them from doing not just their old job but similar work as well.
This will also apply to short-term injuries.
“If a plumber broke his leg snow skiing, in the past he would have lodged a claim which, after a 30-day waiting period, would have covered him for the remainder of the 12 weeks that such an injury would typically have incapacitated him for,” said Mark Kachor, principal at insurance researchers DEXX&R.
“But from October, if he were able to go into the office and do some quoting over the phone, then he would be considered working and wouldn’t qualify [for a claim].”
Under the old system, people typically could get paid until they were 65 or 70 if they were incapacitated.
Now, 65 will be the upper limit – and Mr Kachor said “some insurers have said they will taper payments down from age 60”.
“It’s going to be harder to claim and policies are most likely not going to pay you for as long,” he said.
However, given that most people claim for two months or less, long-term payments will not be an issue for most policy holders.
What about insurance in superannuation?
Many people hold income protection insurance inside their super funds and they will not be affected by the changes.
Insurers review those policies, known as group policies, every year and change the fees and terms as a result of those reviews to ensure they are not losing money.
However, in-super policies tend to deliver lower benefits than those bought by individuals.
The changes to individual policies are the result of regulator APRA deciding the insurance industry was losing too much money on income protection and that this threatened the viability of the industry.
“That’s a pretty unique situation,” Mr Kachor said.
“The important thing is to act now if you want to get income protection insurance,” Mr Simon said.
But the new rules will have no effect on your policy if you already have one in place.
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