Due to rising income protection premiums and feedback from insurers to the Australian Prudential Regulation Authority (APRA), a review of all Australian income protection policies and definitions has been conducted. APRA have now released recommendations which all insurers will need to implement in due course. Some of these recommendations will be implemented at a later date, however the most pressing change is to Agreed Value benefits.
What are the changes?
As of 31st March 2020, insurers may no longer be able to offer Agreed Value income protection policies to new customers. Agreed Value insurance effectively “locks in” the level of benefit a client may receive at claim time. With an Agreed Value policy, the monthly benefit is based on the income declared (and generally proven) when the policy holder first applied for cover, i.e. from inception of the policy. At claim time, the insurer pays a benefit based on the declared monthly income (financial evidence may be required to support the income declared) regardless of whether the policy holder’s income has increased or decreased over time.\ \ From 1st April 2020, the only benefit option that may be offered through income protection will be Indemnity Value contracts. With Indemnity Cover clients need to provide financial proof at claim time to substantiate their pre-disability income to calculate their monthly benefit, whereby with Agreed Value the client needs to provide financial proof at time of application. This means that with Indemnity Cover, if a client’s income has decreased since initially applying for cover, the benefit will be calculated on the reduced (i.e. current pre-disability) income.\ \ Agreed Value isn’t necessarily the best option for everybody, but it can suit those individuals that are self-employed or client’s whose income fluctuates. Indemnity Cover can be a more cost effective option, however does not provide the certainty of an Agreed Value contract.
What does this mean for you?
If you already have an Agreed Value policy in effect, you can retain your existing policy. The changes will only impact new policies going forward.\ \ If you have Indemnity Cover or no Income Protection cover and would like to obtain an Agreed Value policy, now is the time to review this. After 31st March 2020, insurers may not be able to offer Agreed Value policies.\ \ If you would like to discuss whether an Agreed Value policy is appropriate for you or would like to review your existing cover, our team of advisors would be happy to assist. Get in touch with our team and we will book in a complimentary risk review/discussion.
To learn more about the upcoming changes to Agreed Value policies, read the media release published by APRA here:https://www.apra.gov.au/news-and-publications/apra-intervenes-to-improve-sustainability-of-individual-disability-income.