Beware: Income Protection Post-Govt Changes

The most generous income protection cover in the world used to be available in Australia. However, the government regulator for insurers, Australian Prudential Regulation Authority (APRA), became very concerned this was unsustainable with insurers recording losses of around $3.4 billion over the five years to December 2019. APRA felt that without serious reform, insurers may not survive to be able to pay claims in future, insurers could exit the market altogether and premiums could explode. Even after several warnings from APRA, insurers continued their arms race with increasingly more generous features whilst maintaining relatively low premiums. So APRA intervened with big changes in April 2020 and October 2021, restricting how generous new income protection policies could be.

As a Doctor, whether you are considering changes to your existing cover or applying for new cover, it is important to understand the key differences between the income protection definitions for policies in place before and after these government changes. This is especially the case for Doctors with irreplaceable pre-20202/21 policies who should be very cautious about making any changes, without understanding the implications for them and their family’s financial security.

So, what are the key differences?

1. Own Occupation limited to 2 years

Pre-October 2021 income protection policies offered by reputable insurers generally offered an own occupation definition for the duration of any claim through to the end of the benefit period e.g. age 65.

As highly-educated, highly-skilled professionals, we believe this is absolutely essential, as it protect Doctors from being pushed into ‘any occupation’, if an injury or illness deems them unfit to perform their profession at the time they took out cover.

Following APRA’s regulatory changes, post-October 2021 policy inception claims extending longer than 2 years* are subject to an ‘any occupation’ clause. Under this clause, the ‘own occupation’ definition is only applicable for the first 2 years of a claim and policyholders are no longer able to claim if they can perform ‘any occupation’.
Previously, policyholders were measured against their own occupation and may have been able to claim indefinitely if they could only not perform it. The impending changes will see that after two years, claims will be assessed on the ability to work in ‘any occupation’ based on training, education, and experience, and one that the disability wouldn’t prevent anyone from performing.

*Please note that there is currently one reputable insurer who still offers an own occupation definition for the duration of any claim through to age 65, although this is conditional.

2. No more guaranteed insured amounts

Prior to April 2020, you could lock in your benefit amount when you first obtained your policy, which is known as an Agreed Value contract. This means you are guaranteed to be paid your full insured benefit, regardless of your earnings just prior to claiming.

From April 2020, Agreed Value was no longer allowed. All new policies became available on an Indemnity basis only, meaning payouts are aligned to your actual income at claim time and may be less than your actual insured benefit.

For employee Doctors planning to stay working with their employer long-term this may be less of a concern than self-employed Doctors in the process of building up their private work and resultant income, those expecting future unpaid parental leave, fellowships, sabbaticals or reducing their hours. But life happens and even the best plans can change, so ideally you would maintain an Agreed Value policy if already in place.

3. More restrictive disability definition

The pre-APRA change policies generally offer the most generous outcome of a duties-, income- or hours-based disability definition. If you can still work up to 10 hours per week or enough to generate up to 20% of pre-disability income, you would still qualify for a total disability claim and payout of your full insured benefit. Overall, this means you are more likely to be able to claim and also more likely to receive the maximum amount possible.

Post-October 2021 inception policies only offer a duties-based disability definition.

Old vs new policies

Old policies (pre-2020/21):

The more generous definitions are ‘grandfathered’ i.e. as long as you keep paying premiums, your generous policy features remain. Depending on your specific policy, that likely includes an own occupation definition for the duration of any claim, Agreed Value and more generous disability definitions.

Old policies can also be changed/increased with the same generous definitions.

All of this also means such older policies are not directly comparable with new policies.

New policies (post-2021):

More economical in some cases, but less generous.

Practical advice for Doctors

With an old policy (pre-2020/21):

Once you cancel an old policy, you can’t get the generous definitions back. Switching from an old polict to a new policy will likely mean forsaking valuable features. So for many Doctors, keeping an older policy can still be wise, even if premiums rise – with the full tax deduction somewhat offsetting these.

If you are unsure though, don’t cancel an old policy without getting advice from an expert in insurance for Doctors. This will enable you to carefully compare the cost-benefit of retaining versus switching, as once an old policy is gone, it’s gone.

Seeking a new policy (post-2021) with no old policy in place:

Seek advice from an expert in insurance for Doctors. They can tailor strategies and products to mitigate the potential financial security gaps created by the government changes to income protection.

Reference: https://www.apra.gov.au/news-and-publications/apra-resumes-work-to-enhance-sustainability-of-individual-disability-income