BEWARE – Changes to Income Protection Insurance

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Beware - Changes to Income Protection - Ceebeks Business Solutions for GOOD

Income protection is an insurance policy which pays you a benefit if you’re unable to work due to sudden illness or injury.

There are two different kinds of income protection insurance – agreed value and indemnity value. Agreed value policies are usually more expensive, but they’re great for people who may have a fluctuating income.

How agreed value works

When you buy an agreed value policy, your insurance company promises to pay you a percentage of your income – usually a maximum of 85% – if you ever have to make a claim.

Your insurance company will ask for proof of your income when you apply for the policy – but you’ll never have to prove it again. It doesn’t matter whether you switch jobs, earn a bit less money or just have some time off – as long as you keep paying your premiums, you’ll get the pay-out you originally agreed on, if you have to make a claim.

However, there are some major changes coming to income protection insurance – and they could have a serious impact on lots of workers.

What’s changing?

From April 1 2020, APRA is rolling out new rules which stop insurance companies from issuing any new agreed value income protection policies. If you already have one – or you get one before April 1 – you can keep it, but otherwise you’ll only be able to apply for an indemnity value policy.

With indemnity value, you can’t fix the value of the benefit you’ll receive. Instead, the insurance company will base the payout on what you earned in the 12 months before you made your claim.

That’s not the only major change. Right now, you can hold an agreed value income protection policy until you reach retirement age – but a maximum policy length of five years is set to be introduced.

Among other things, there’ll also be stricter underwriting criteria and limits on monthly payments – although it’s not 100 percent clear exactly how they’ll work just yet.

Potential example under the current rules

David has an ‘endorsed agreed value’ income protection policy. At the time of policy inception, David was an employee, and was able to prove his income for $6,000 per month.

David is now self-employed, and is earning after expenses and add-backs $3,000 per month. He goes on a totally disability claim.

He is entitled to $6,000 under his ‘endorsed agreed value’ contract up to age 65 years.

Potential example under the rules from 1st April 2020

David has an ‘indemnity value’ income protection policy. At the time of policy inception, David was an employee, and was able to prove his income for $6,000 per month.

David is now self-employed, and is earning after expenses and add-backs $3,000 per month. He goes on a totally disability claim.

He is entitled to 75% of $3,000 under his ‘indemnity value’ contract up to a maximum of 5 years.

Who will it impact?

Anyone who has a fluctuating income – or thinks they might have a fluctuating income in the future – will be the worst affected by the upcoming changes.

So that includes:

  • Self-employed people and small business owners -Business could be slow in the months leading up to a claim. If so, the insurance company would take this into account and benefits would be less than originally anticipated.
  • Anyone taking parental leave or caregiver leave – If a person takes time off, at a reduced wage, to have a baby or look after a family member – then makes a claim within 12 months – the benefit amount would be reduced.
  • People with commission-heavy wages – If the person lodging a claim had a bad year leading up to the accident or illness, their payout would be much less than expected.
  • Anyone taking a temporary pay cut – Taking time out to retrain, temporarily dropping down to part-time, or even going travelling for a few months could all have a negative impact on the potential benefit.

If you are concerned about your current income protection policy or want to make sure you can take advantage of the rules before the 1st April 2020 changes then contact our office on 5561 2643 and arrange a meeting with our financial adviser before it’s too late!

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