Why you need to take out income protection cover now
A CAIRNS finance and insurance expert has warned residents to take out income protection cover now before unsettling new changes become mandatory from the end of the month.
Fowler's Group financial planner Paul Fowler said changes to policies that provided payouts in the event a holder cannot work would "drastically reduce the quality of the cover".
Last year, the Australian Prudential Regulation Authority released sustainability measures for individual disability income insurance (DII) to address the industry's poor performance of income protection.
The changes mean companies must cease offering agreed value income protection by April 1, 2020, and ensure benefits do not exceed the policyholder's income at the time of claim as well as avoiding offering DII policies with fixed terms and conditions of more than five years. "It will affect the retail income protection market. Cover in superannuation funds will not be affected, however, these policies are generally inferior products any way," Mr Fowler said.
"For new income protection policies after March 31, benefits will no longer be guaranteed, maximum payment period may be reduced, occupation and income details will be reassessed regularly and the contract may be cancelled by the insurer.
Current policies and those commenced before March 31 will be grandfathered and the top policy conditions continued.
"Those looking at getting cover or thinking about it should do it now.
"People who currently have a policy should review it and … adjust to top cover if need be. If you have a current policy now hold on to it with both hands."
APRA executive board member Geoff Summerhayes said DII played a "vital role in providing replacement income to policyholders when they are unable to work due to illness or injury". "In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work," he said.
"By introducing these measures, APRA is forcing the industry to better manage the risks associated with DII and to address unsustainable product design features - or face additional financial penalties."