Are you self employed, a small business owner or a commission-based employee?
Or perhaps you’re currently employed, with plans to take time off in the next year, maybe for parental or carer’s leave, travel, study or even change to part time work?
If this sounds like you, please read on. There are some significant changes to income protection insurance, taking effect on 1 April 2020 that could have a serious impact on thousands of workers and could affect you.
What is income protection insurance?
Income protection is an insurance policy which pays you a benefit if you're unable to work due to sudden illness or injury. There are two different kinds of income protection insurance - agreed value and indemnity value.
How an ‘agreed value’ income protection policy works
Agreed value policies are usually more expensive, but they generally suit workers with a fluctuating income. Examples include self-employed and commission-based employees. When you take out an agreed value policy, you have the security of locking in an ‘agreed’ amount that will be paid if you are disabled and unable to work.
When you initially apply for the policy, your insurer will require proof of your income - but you won’t have to prove it again – even if you change job, drop income, switch to part time, go on maternity leave, or even if you have time off. As long as you keep paying your premiums, you'll get the pay-out you originally agreed on, if you have to make a claim.
How an ‘indemnity’ income protection policy works
In an indemnity value policy, if you have to make a claim, any benefit amount that you will receive will be calculated using your actual income of the previous 12 months prior to make a claim, (rather than being set at the time you take out your policy).
Indemnity policies are generally more affordable, and suit those who have a regular employment and receive constant increases in salary. However, if your salary has decreased between the time you took out the policy and the time of your claim, you will be worse off.
What are the changes taking effect 1 April 2020?
APRA (the industry regulator) is rolling out new rules to stop insurance companies from issuing any new agreed value income protection policies. If you already have one, or you get one before April 1 - you can keep it, but otherwise you'll only be able to apply for an indemnity value policy.
Currently, you can hold an agreed value income protection policy until you reach retirement age. Moving forward, a maximum policy length of five years is set to be introduced, which means you will need to again provide proof of income and occupation after 5 years of holding the policy.
There'll also be stricter underwriting criteria and limits on monthly payments - although we are still awaiting clarification on how that will work.
Who will it impact?
Anyone who has a fluctuating income, (or anyone who expects their income to decrease or fluctuate in the future) - will be the worst affected by the upcoming changes. Generally, this will include:
Workers whose wages are mostly comprised of commission
Small business owners
Anyone taking parental leave or carer’s leave
Anyone taking a temporary pay cut.
What should people do now?
Because the changes taking effect are more restrictive, it is a case of lock it in or lose it!
Have a Financial Adviser review your personal circumstances, to see if there is a more appropriate and competitively priced policy for you.
If you have no cover then consider protecting your greatest asset – your ability to earn an income!
If you have an existing Agreed Value policy then a review will help you establish if it is still appropriate and cost effective. After 31 March 2020 you will not be able to take out a new “Agreed Value” policy so you may be locked in with that insurer for life.
If you have an existing Indemnity policy then consider whether it would be more appropriate to have the certainty of an “Agreed Value” contract that cannot be changed (for at least 5 years).
There is a small window of opportunity, up until 31 March 2020, for current policy holders or people considering income protection to lock in current benefits before they are excluded forever, so act now!
Need help? Investment Zone is here for you. Arrange a free, no risk, no obligation appointment at www.investmentzone.com.au/bookonline
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