A Guide to The 1 October 2021 Income Protection Changes

Russell Cain Updated: 25 October 2021

You may find that your greatest asset is often also what makes you most vulnerable. With recent changes in the insurance industry and APRA’s new tighter guidelines, you’ll need to inform yourself of the new limits on monthly benefits, changes to disability definitions and other changes which may impact the way you care for your family. 

Insurers were required to have implemented the latest regulations set out by APRA by 1 October 2021. However, these are not the only changes to these types of policies in recent years. The first round of amendments to new income protection policies  were put in place in March 2020, when Agreed Value policies were taken off the market.

Why were these changes implemented?

High claims rates, and major subsequent losses to insurers due to unsustainable generous policy terms it was important to make sure that income protection policies remain viable. This is generally seen as the main influencing factor behind APRA’s suggested changes. However, change is not necessarily a bad thing. These new approaches are intended to make income protection simpler and more affordable over the longer term.

Monthly benefits capped at 70%

If you purchased an income protection policy in the past, you typically had the option to secure cover for 75% of your gross monthly income. Certain insurers even offered members the option of boosting their coverage up to 80%. These benefits could then be used to cover your expenses while you are unable to work. However, after 1 October 2021, insurers have been required to ensure that income protection policies do not offer benefits that exceed 70% of your earnings at the time of making a claim. However, can provide up to 90% for a maximum of 6 months. Additionally, select insurance companies have adjusted their maximum monthly benefit from $60,000 down to $30,000.

New disablement definitions

Before the October 2021, income protection changes came into effect, most policies had an  “Own-occupation” definition that applied up to age 65 or for the duration of your benefit period. Generally, this meant that if you were ill or injured and unable to work for longer than the waiting period as per the recommendation of a medical professional, you would typically be able to make a full claim if you weren’t able to perform at least one of the essential income-producing duties in your speciality or occupation.

According to the policy documents of several major insurer’s one of the most significant changes to income protection is the switch to an “Any-occupation” definition after the first 2 years of you being on claim. Typically, this new definition allows insurers to stop your benefits if they find that you can return to any work you are reasonably suited to by education, training or experience. In effect, this means that for you to be defined as fully disabled, you would need to be able to prove that you are incapable of participating in all of your income-producing duties, for any occupation suited to you by education, training and experience.

Income calculations changed

Another significant change brought in by APRA is the manner in which your income at the time of claim is calculated. If you purchased an income protection policy before the reforms were implemented, select insurers allowed your income to be  assessed based on the best 12 consecutive months over a 2 or 3 year period. This type of calculation was typically highly beneficial to those earning a variable income as their benefits were calculated according to their highest-earning over a consecutive 12 month period.If you were to apply for a new policy today, your income would be calculated according to your income at the time of making your claim. However, it’s important to note that they generally will look at the income you earned in the 12 months prior to making your claim. If you earn a fluctuating income, select insurers may look at  your average earnings over a 2 year  period. If you’re unsure how your income at risk will be calculated, it’s typically best to refer to your Product Disclosure Statement (PDS).

Overview of the 1 October 2021 income protection changes

Features & BenefitsPre 1 October 2021Post 1 October 2021Replacement ratiosUp to 75% of personal exertion incomeUp to 90% for the first 6 months, then up to 70%Up to 70% of personal exertion incomeUp to 70%, then up to 60% after 2 yearsMax sum insured$60K monthly benefit$30K monthly benefit

Take note: Select insurers still offer a $60K monthly benefit, refer to your PDS to learn if this applies to you.

Total disablement definitionsOwn occupation definition usually applies for entire claim period3 tier definitions were offered by select insurers (hours, duties or income)Generally Own occupation definitions applies for the first 2 years of claim; any occupation (ETE) applies after 2 years on claim1 tier definition (all important income producing duties)Participation in reasonable retraining or
rehabilitation where appropriate – may be requiredIncome at risk calculationsVarious definitions used across the market, including best 12 consecutive months in 36 months pre-disablement.Income earned at claim time and not more than 12 months old, or average earnings over an appropriate time period (for claimants with fluctuating incomes)Capacity to workPart of the calculation of partial disability benefitsPart of the calculation of total and partial disability benefitsOngoing income and paid leaveNot always offsetOffset from Day 1 paid leaveSuperlinkingAvailableGenerally Not availableSeverity booster optionNot applicableNew option – allows for an additional 20% to be paid in the first 6 months for severe trauma events and hospitalisation

Onepath income protection fact sheet, Zurich income protection fact sheet (October 2021)

Will this affect your current income protection policy?

No, if you applied for your income cover before the 1 October 2021 deadline, then your cover won’t be affected by these changes. This is because the features and benefits outlined in your policy documents were agreed upon before the changes came into effect. However, if you are at all uncertain about the terms of your cover, it’s generally a good idea to refer to your Product Disclosure Statements (PDS) or contact your insurer directly.

Further changes to income cover

The changes outlined above are not the end of the reforms proposed by APRA. The next stage of sustainability measures are set to come into effect no later than 1 October 2022. From this date onwards, insurers will no longer be able to offer their members guaranteed renewable income protection policies. After this deadline, you may only be able to purchase policies that are guaranteed renewable for a period of no longer than 5 years. If you should choose to renew your policy after that period, your insurer will generally review your circumstances. Should they discover any changes in your occupation or financial circumstances the insurer will adjust the benefits on your policy accordingly.

Frequently asked questions & answers

Can you have two income protection policies?

Yes, generally you’ll be able to hold two income protection policies at the same time. However, it’s important to note that these types of policies typically contain built-in offset clauses. This means that the combined maximum benefit you’ll be able to receive from both policies is generally limited to 70% of your income.

Is it still worth getting income cover?

Yes, typically your income helps you to support not only yourself and your family, but it also allows you to save for retirement. Losing your income because of a disability could potentially have a devastating impact on the quality of your life. By applying for income cover, you generally ensure that you can continue providing for your loved ones even if you are no longer earning an income.

How is income protection cover calculated?

To work out your income at risk when you are ready to make a claim on your policy, your insurer will typically calculate your monthly benefits according to your average monthly income for the past 12 months. However, if you work as an independent contractor, for example, and have an income that fluctuates, your insurer may look at your average income over an appropriate period of time, however check the relevant PDS.

How much income protection can I get?

Generally, you’ll be able to purchase an income protection policy that covers up to 70% of your monthly salary. Depending on who you are insured with, your monthly benefits may be capped at $30,000 or at $60,000. It’s typically a good idea to refer to your Product Disclosure Statement(PDS) or speak with your broker or insurer to find out how much income protection coverage you are eligible for.