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Changes to income protection products impact choice but improve sustainability

06 February 2020 | Avant media

The Australian Prudential Regulatory Authority (APRA) recently announced changes impacting the types of income protection cover life insurers can offer. APRA is making these changes to safeguard sustainability by addressing “flaws in product design and pricing”.

What are the changes?

From 31 March 2020, life insurers must cease offering income protection products with ‘Agreed Value’ terms to new customers. Agreed Value policies use the insured person’s income at the time of application, effectively locking in a monthly benefit amount irrespective of whether the insured person is still earning the same income when they make a claim.

Often people with incomes that fluctuate year to year, choose this type of cover as they will not be penalised if they are going through a lower income period when they claim. However, it has also led to the insured person receiving claim benefits at a higher level than their actual income. While this benefits the individual, it can reduce their incentive to return to work and result in costly payouts for the insurer. Organisations have been reluctant to make these changes on their own accord for fear of being uncompetitive despite the unsustainability of the products they are offering, hence APRA has stepped in.

Following this change, only policies with an ‘indemnity’ definition will be available. Indemnity policies look at how much income the insured person was earning at the time of the claim and base the monthly benefit on that more recent figure. The good news is indemnity policies are typically around 15% less expensive than Agreed Value policies.

Further changes to follow

In addition to the removal of Agreed Value policies from sale, further changes are expected to be rolled out in 2021. Several measures have been outlined for the industry to consider, such as introducing a maximum monthly benefit of $30,000 per month and reducing the proportion of income that can be insured to 75% for claims continuing for longer than one year. It has also been proposed to place stricter criteria on claimants remaining on claim payments for long periods. At this stage, APRA is only seeking feedback from the industry. While there is no certainty these additional proposed measures will be implemented, it is clear the product terms available to consumers will become more restrictive than those currently available.

How are existing customers impacted?

Existing in-force policies are guaranteed to retain their current terms – they will not be impacted by the removal of Agreed Value policies from sale, nor will they have the more restrictive terms proposed in the 2021 measures, applied to them. This is because life insurance policies are guaranteed renewable, meaning so long as premiums continue to be paid, the policy will continue on its current terms (or better terms if updated by the insurer) until the policy end date.

It is possible though, that existing policies will incur premium rate increases as life insurers attempt to return these products to profitability.

What is the impact on Avant’s Income Protection customers?

Avant has always believed that providing income protection with Agreed Value terms was not sustainable, so we do not offer them. We will monitor industry developments to ensure our products continue to meet the needs of doctors and legislative requirements.

Further information on these changes can be found on the APRA website or to find out more about Avant Life Insurance*, call us on 1800 128 268 (option 5).

*Important: Any advice here is general advice only and does not take into account your objectives, financial situation or needs. Avant Life Insurance products are issued by NobleOak Life Limited ABN 85 087 648 708 AFSL 247302 (NobleOak). You should consider whether the product is appropriate for you and the PDS for the relevant product, available by contacting us on 1800 128 268, before deciding to purchase or continuing to hold a policy or plan.

This information is not comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Avant is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published.

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