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Major changes coming to income protection cover from 1 October 2021

Thinking about taking out income protection? Now is the time to act.


By 1st October 2021, all major life insurance insurers must stop offering their current range of income protection policies and start issuing policies which comply with APRA’s Sustainability Measures.


Existing income protection policies and their benefits will be preserved, so it is important to get your cover in place before the changes hit.


What are the proposed changes to income protection policies?


In March 2020, APRA forced insurers to cease issuing Agreed Value policies and signalled further changes were coming.


In September 2020, APRA outlined the changes it wanted to see in place before 1st October 2021:

  1. Income replacement ratios to be reduced to 70%, from 75% currently.

  2. Other benefits in the first six months of a claim to be restricted to an additional 20%, i.e. a limit of 90% overall. This compares to the current range of benefits which can be double this.

  3. The insured income will be based on the income earned in the 12 months prior to the claim rather than the ‘best 12 months over the previous 36 months’. This means that you may be paid a lower amount if your income was less in the year you claim on your policy.

  4. Long benefit periods, such as to age 65, to be managed to maintain a motivation to return to work. This may include changing from “Own Occupation” to “Any Occupation” definition after 2 years on claim.

  5. Policies to be guaranteed renewable for no longer than 5 years, compared to current policies with terms of up to age 65 or 70.

APRA has since backtracked on the timing of the last measure i.e. the changing of the policy contract term to 5 years. On 12th May 2021 APRA announced that they would give insurers another 12 months to implement this measure. Insurers had reportedly been unable to work out solutions to satisfy APRA’s measures without “unintended adverse consequences for consumers”. However, APRA has reaffirmed its commitment to move away from the current practice of locking in terms and conditions for extended periods of time.


Life insurance companies are still pushing ahead with the other measures. Some insurers have already indicated that they intend to go further than the proposed APRA changes by reducing income replacement ratios to 60% or even lower. Other parties such as the Actuaries Institute have proposed a range of even more restrictive measures.


The new products are expected to be introduced in the months leading up to the October deadline.


Although the details are not yet known, it is clear that the effect of these changes will be to water down the benefits offered by income protection policies in the future.


What actions can you take ahead of the changes?


If you already have an income protection policy:

No immediate action is required. You will be able to maintain your policy in its current form. However, it will be much harder to switch policies in the future without a significant loss of benefits.


If you are considering switching between indemnity policies, then it would be advantageous to do this before 1st October. This is because the definitions of indemnity income and the range of ancillary benefits available now will be more generous than those after the change.


If you don’t have an income protection policy:

If you don’t already have income protection cover in place, below are additional important considerations:

  • Your greatest asset in life isn’t your house or superannuation, but your ability to earn an income – over a working lifetime of 40 years, an Australian earning the median wage will earn around $3,000,000 in their lifetime. You insure your home, why not your income?

  • Income protection cover is tax-deductible, effectively discounting your premiums by 19% to 47% depending on your level of income.

  • Income protection policies can offer other benefits, for example, upfront payments if you break certain bones or upfront payments if you are diagnosed with a major disease or cancer.

  • Income protection cover offered by your superannuation fund may be of low quality and not priced very competitively compared to more comprehensive policies outside of superannuation.

  • Until October you can still take out an income protection policy which has a 75% income replacement ratio.

If you have not organised income protection cover for yourself already, now is a great time to do it, before these changes are introduced.


If you do have some cover, but you haven’t reviewed it in a while, or perhaps you only have cover held in your super fund, contact us for a chat to review appropriate cover options.



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