Keep in mind the following information is General Advice and is obviously not personalised for your unique needs, objectives or financial situation. Please get in touch with your advisor before taking any action on the below points so they can advise on the appropriateness of this for you.
Your future earning ability is your most important asset and it is arguably more important to protect this than insuring your home. Income protection insurance is an essential tool to partially replace your income in the event of serious illness or injury that renders you unable to work, and annual premiums are tax-deductible.
It is important to be aware of sweeping changes to income protection policies, some of which are already in place and some that come into effect in October 2021. The changes are a result of the insurance regulator intervening into the industry to address substantial and unsustainable ongoing losses on these policies.
Here are the major changes to reform the industry:
No new ‘Agreed Value’ income protection policies
Since 31st March 2020 insurers have no longer been allowed to offer Agreed Value income protection policies to any new clients but may uphold existing policies. Agreed Value policies refer to policies where the monthly insured amount is agreed upon at the commencement of the policy, without needing to prove what you were earning at the time of claim. This provided additional security for self-employed persons whose annual income may fluctuate.
While existing Agreed Value policies are not affected, all new offers are based on an Indemnity Value where the value of the claim paid is based on the amount of your income in the past year, or two years, dependant on the terms and conditions of the policy.
Removal of “guaranteed renewable” on new policies
Currently, insurers guarantee that policies will be renewed each year for at least the same level of cover and under the same (or improved) terms and conditions over the contract period (e.g. to age 65), providing you continue to pay your premiums on time.
From 1 October 2021, insurers will no longer be able to offer policies that are “guaranteed renewable”. Instead, policies will be subject to a review every 5 years regarding your income, occupation and the generosity of the terms and conditions of your policy. This means the insurer may decide to change the terms and conditions you need to satisfy to make a claim. The contracts can be renewed without medical reviews for further periods (not exceeding 5 years).
Existing policies and policies entered into prior to 1 October 2021 will continue to be guaranteed renewable for the life of the policy.
Stricter rules around disability claims and cover
From 1 October 2021 the regulator expects insurers to incorporate design features into their products to control risks associated with longer-term policies (such as to age 65), for instance, stricter disability definitions, moving from a three-tiered definition of disability (duties, hours, income) to a one-tiered definition based only on important duties, reducing the income replacement ratio after a specified period of time on a claim or adopting a stricter ‘any occupation’ definition after an initial ‘own occupation’ two year benefit period. Insurers are currently in the process of developing new policies in line with these changes.
If you do not have income protection insurance or wish to increase your cover, now is an opportune time to apply to gain the benefit of guaranteed renewability and more favourable policy definitions before the 1 October 2021 changes. If you would like to apply or review your insurance policies, please contact your Morrows Private Wealth advisor.