Income protection changes set to make insurance policies stricter

A typical worker earns $3 million in a career, and protecting it is important, but new insurance changes will make this trickier.

Stricter new rules for income protection insurance are about to start, prompting a warning for people to take a closer look now.

This common type of life insurance – which pays an ongoing income if a person can’t work because of injury, illness or disability – has been losing insurers billions of dollars amid soaring claims, and regulator APRA’s changes from October 1 aim to stem those losses.

RSM Australia financial adviser Kirsten Genter (pictured) says the rule changes for new policies will cause a drop in the amounts that may be paid out and stricter definitions that are likely to reduce long-term claims.

“Income protection insurance will be less generous from 1 October,” she says.

Currently a policy pays up to 75 per cent of your wage, but this will drop to “60 or 70 per cent” after the first six months, Genter says, while other changes mean you may have to return to work in any occupation rather than the one you’re insured for.

RSM Australia financial adviser Kirsten Genter says insurance will be less generous.

“For example, if a plumber still has a back injury after two years and can’t do his duties as a plumber, but he can work as a salesman, he will not be able to continue to claim on his income protection policy,” she says.

“Insurers have experienced losses of over $3.4 billion on income protection policies over the past five years.”

BDO Australia wealth adviser Michael Ryan says other October 1 changes will potentially reduce the income paid out by a policy, and people thinking about cover might want to act quickly before the changes come into force.

“Your greatest asset in life isn’t your house or superannuation, but your ability to earn an income,” Ryan says.

“Over a working lifetime of 40 years, an Australian earning the median wage will earn around $3 million. You insure your home, why not your income?”

Goldsborough Financial Services risk specialist Craig Kirkwood says if your income gets turned off at age 30, 40 or 50 and you are not insured, any strategy you had planned around owning a home or building wealth “just goes”.

“We have had a lot of clients wanting to review and get everything in place,” he says.

“If you have an application submitted before October 1 and it’s accepted within four to six weeks, that policy will be effective as of today’s rules. Any polices applied for after October 1 are subject to the new rules.

Originally published as Income protection changes set to make insurance policies stricter