As of the 1st October 2021, Income Protection policies completed their last phase transitioning to the 'new world' of Income Protection policies. For those of you with existing policies, you would have seen a seemingly endless increase in premiums over the last few years leaving many of you questioning whether you will keep, change or cancel these policies altogether.
So, what can you do with your current Income Protection policies? Well, there are a number of options available to you and I will walk through each of these in detail.
This article will take a look at all of the options that you have available to you with your current policies before being forced to make the ultimate decision being to cancel or switch to the new policies.
Please note, if you decide to cancel your existing policy please understand that this decision is final and you will not be able to re-access these now closed policies. I understand the frustration you would be feeling with the constantly increasing premiums.
This article will allow you to better understand the options available to you so you can make an informed decision about the best way forward for you.
Summary of the changes & Key Dates
Income Protection policies have been in the eye of the storm over the last few years with many factors having a dramatic readjustment on what you can and cannot obtain from these policies.
The main reason for the changes has been the steady decline in profitability for the insurance companies in recent years largely driven by Income Protection across the different insurers.
Whilst you may not be concerned about how profitable the insurance companies are, the reason it is important to you is that to honor the commitment to pay you should you even need to claim, the insurance companies need to stay in business.
The one lever the insurance companies have gone back to more frequently in recent times is premium increases.
The situation got so bad that the government (APRA) has been forced to step in and provide guidance and a framework for the insurance companies to follow.
Key Date #1 - 1st April 2020:
The first round of changes came into effect as of the 1st April 2020 which saw the discontinuation of the sale of Agreed Value Income Protection policies. All Income Protection policies after this date could only be sold as Indemnity Contracts.
As a quick refresher:
- Agreed Value - this means that you prove your earnings (with financial evidence) when you apply for the policy and you are not required to do this again if/when you claim
- Indemnity - no requirement to provide financial evidence upfront however if/when you claim, you are required to provide financial evidence to support your earnings and claim. The period of time allowed to prove your income prior to claim will vary depending on your policy so make sure you check this for yourself if unsure.
Check out this earlier article I wrote about these changes in greater detail.
Key Date # 2 - 1st October 2021:
The second and more drastic round of changes came into effect from the 1st of October 2021. These are slightly more complicated as, unlike the earlier changes which we implemented by all of the different insurance companies in exactly the same way, the latest round of changes has seen each insurer interpret the rules and build their own version of Income Protection policy that meets the rules of the new world.
There are 4 main changes that came into effect:
- Limiting the way income at claim time is calculated
- A cap on the replacement ratio (how much you can claim as a percentage of your income)
- Limiting the contract term to 5 years (at which point you can renew your policy but this would be subject to limited underwriting)
- Long-term benefit controls (measure to reduce the duration of claims as these long term claims account for the majority of the losses for the insurance companies)
For a more detailed explanation of the changes and the impacts of these on you, check out this article I wrote.
What this has meant to current premiums?
Many policies have seen a transition period where old limits were phased out with new limits being phased in. This transition process has been a long and painful one with many policyholders on the cusp of canceling their policies altogether due to huge increases in premiums year on year.
What has become evident is that Income Protection policies on offer before 1st October were priced incorrectly and designed in a way that was far too generous to you as customers.
This is a strange concept as both of these factors were set by the insurance companies themselves. Whilst hindsight makes seeing these issues very simple, we are now faced with a situation that change is here and some of the previously held beliefs we had about income protection need to change to adapt to this new world.
I have mentioned this in earlier articles but these key dates have created distinct insurance pools that are being priced individually (and increases being different depending on which pool you are in and also which insurance company you are with).
By way of example, we have seen price increases with all of the insurance companies ranging from mid-teens to some of the insurance companies increasing premiums by over 100% in a year.
These pricing increases will depend on both which pool of premiums you fall into and also how your specific insurance company has decided to re-price those pools.
Irrespective of whether you are on the lower or higher end of these price increases I don't know anyone who loves to see their premiums increase. This is a conversation I have been having a lot in recent years.
Will this trend continue?
In my opinion, I believe that these changes will continue indefinitely until you are forced by the insurance companies to either move to the new products being offered post 1st October 2021 or cancel your policy altogether.
Switching to new Income Protection policies or canceling altogether I consider being the last jump.
If you do have an existing Income Protection policy in place, depending on which insurance pool you belong to, you will have a number of options you can exercise before being forced to make that last jump.
For example, if you have an Agreed Value policy issued before 1st April 2020, you could consider switching from Agreed Value to an Indemnity contract which would mean you could switch from Pool A to Pool B which would buy you a little bit more time without having to make the last jump.
Let's now have a look at some of the other alterations you can make to your existing policies before having to make the last jump.
What can you do with your current policies?
This is probably the most common conversation I am having at the moment with those of you who have existing Income Protection policies.
Given the infancy of these new products, it is still a little bit unknown how the market will look in the future so I am being very wary about making major changes for those of you with existing policies right now whilst the dust settles on this a bit more.
I believe that it is inevitable that most of us will eventually be forced to make this last jump (ie move to the new products or cancel our policies). Some of the below strategies will allow you to have a little bit more time with your more feature-rich Income Protection policies.
I believe there has never been a more important time to be regularly reviewing your policy and having a plan to navigate these changes (you may even want some help with that from an expert 😉).
Some of the strategies I have been exploring for those of you with existing policies are:
- Switching from Level Premiums to Stepped Premiums - previously, I absolutely loved Level Premiums for Income Protection in the right circumstances. Level premiums rely on the insurance companies increasing their premiums at 'normal' intervals. Given the volatility of the Income Protection market at the moment, in my opinion, we will continue to see more regular re-pricing of these premiums so reviewing the validity of your Level Premiums is something you could consider
- Switching from Agreed to an Indemnity Contract - Agreed Value policies are amazing for those of you with fluctuating income. Depending on your policy, some Indemnity contracts allow you up to 3 years before the claim date to justify the monthly benefit you have in place. Again, in the right circumstances, you may be comfortable making this switch based on your current position.
- Extending the waiting period - for those of you with waiting periods of 30 or 60 days, you may consider extending the waiting period on your policy to 90 days to see how this will affect the price of your premiums. Obviously, you should be cautious making this change and make sure you have a cash buffer or plan to make sure you can survive this long without income coming through but this again is another option we consider for your existing policies.
- Reducing the monthly benefit - there are a couple of reasons you may consider this:
#1 - you no longer require as much income as when you first applied for the policy. I believe that over time, our insurance needs fluctuate. Before kids and a big mortgage, we need less cover than if you have a family and have just bought your forever home. Remember that the monthly benefit you are insured for on your income protection policy is before tax. To check what your monthly after-tax benefit would be, use this calculator to make sure that this would be enough.
#2 - the new policies have placed a cap on the replacement ratio (ie the percentage of your income that you can insure). Before switching to the new product, get some pricing to reduce the monthly benefit to match that which you would be offered with the new products
- Reducing the Benefit Period - one of the major changes of the new products is the change in definition from Own to Any Reasonable Occupation for those claims that extend beyond 2 years. Those of you with current policies, are assessed whether or not you can work in your own occupation for the whole policy. Statistically, over 90% of all Income Protection claims are finalized within the first 2 years yet the majority of the profitability issues come from those claims that go beyond 2 years. Before making the last jump, get a quote to reduce your benefit period to 5 years and consider the cost/appropriateness of this for you.
- Review any loadings or exclusions - when you applied for your Income Protection policy, you may have been offered a policy with loadings or exclusions based on your health at the time. One thing I always want to make sure to check is that if your health improves, that these loadings or exclusions are addressed and removed where possible. Having a loading reviewed will alter the price of your policy where reviewing a loading will not however it will improve the current policy for you.
- Review Occupation Rating - different occupations carry varying levels of risk for the insurance company and are priced differently. One thing you can do I check the occupation rating you have with your current policy and if there has been a change to your role, qualifications, education, income, etc it is worth checking whether this could improve the occupation rating with your existing product. NB - if your occupation has changed for the worse (ie you went from being a Doctor to a Firefighter you do not have to let the insurance company know) - this is one of the things that the new products are looking to have controls for.
- Review smoking status - did you smoke when you took out the policy but have subsequently quit (more than 12 months without a cigarette/vape)? Make sure that you complete the non-smoker declaration with your current insurance policy which will reduce your premiums. Again, if you were a non-smoker when you took out the policy and now have taken up smoking, you don't need to update the insurance company about this.
Of course, if you no longer need income protection insurance that is fine, and congrats on building up enough wealth to allow you to make this decision.
If on the other hand you are frustrated by the constant increasing premiums and you are about to cancel your policy it may be worth trying some of the suggestions above before canceling your insurance.
Remember to check the key dates above to determine which insurance pool you belong to.
I have put together a 1-page checklist of these options which you can download here.
If you have any questions, or you are looking for some help navigating the changing insurance landscape reach out.