Are all income protection policies the same… the short answer is NO.
There are numerous income protection products (also known as individual disability income insurance or IDII). There are variations in the market, and it can be quite confusing to compare the key differentiators.
Income protection cover helps you meet your financial commitments by providing regular payments if you are unable to work due to sickness or injury. These policies can protect up to 75% of your pre-disability income up until age 65. The premiums for these policies are generally tax deductible and they are also the option to hold this type of cover inside superannuation.
To help you better understand income protection policies, we have listed the key benefits and features you should be aware of before choosing a policy:
Depending on the retail income protection policy selected, the monthly benefit paid to the life insured (or policyholder) may be reduced by other deemed income. This deemed income has the potential to significantly reduce the monthly benefit paid and these offsets may vary amongst Insurers.
Benefit offsets may include, but are not limited to:
Income from personal exertion, income earned in the conduct of the business, unaffected business income, the share of income and profit that continues from a business, sick leave, long service leave, annual leave, workers compensation, other income replacement insurance payments, consumer credit insurance benefits, disability support pension, other social security payments, interest, dividend or rent, other investment income or capital gains, ongoing contractual royalties or annuities, or other similar recurrent income.
Replacement Income ratio
On 1 October 2021, the Australian Prudential Regulation Authority (APRA) individual disability income insurance (IDII) new measures stated that up to 90% of pre-disability income could be replaced in the first 6 months of the benefit period. Also, up to 70% of pre-disability income thereafter. You should be aware that not every insurer has adopted the same approach, and some products have a replacement ratio below 70% (say 60%), at a particular age (say age 60), or after a particular duration on claim (say 2 years).
Usual occupation vs. any occupation
Most Insurers assess the life insured’s ability to work in gainful employment based on their usual occupation (also referred to as own occupation) at date of disablement. However, some Insurers amend this criterion to an any occupation definition based on the life insured’s education, training, and experience once they have been on claim for a defined period of time – often 2 years. This more restrictive total disability definition after a particular duration may restrict claim payments to the life insured, even if they are still incapable of performing their usual occupation.
Sustainability and managing long term benefit payments
Australian Prudential Regulation Authority (APRA) new measures stress the importance of managing the risks associated with long-term claims. APRA provided a list of recommendations on how Insurers could manage claims but were not prescriptive.
Instead, they encouraged Insurers to explore various options to actively manage the risk, and some of these options are listed below:
Own occupation to any occupation
(as discussed above)
Reduction in the income replacement ratio
(as discussed above)
Where the life insured’s treating medical practitioner (or medical specialist) state they have the ability (or capability) to return to their usual occupation, but the life insured chooses not to, then the Insurer can reduce the monthly benefit payment by the proportional number of days they could have worked. This is a way for Insurers to actively manage the risks associated with long-term claims without disadvantaging those who are still legitimately disabled after a particular duration.
Rehabilitation and re-training
It’s important that Insurers don’t just merely pay retail income protection claims, but actively help return clients to health, wellness, and work with appropriate rehabilitation and retraining programs. Some Insurers provide health programs from policy inception to allow clients to take an active role in their own health and wellness. These programs serve to create fitter, healthier, happier clients who are less likely to go on claim, and if they do become sick or injured, they are normally on claim for a shorter duration – reducing the long-term risk to insurers.
How much do I need?
Working out how much cover you need isn’t easy to work out but engaging with an insurance professional can help you sort out your individual insurance cover. The actual amount of cover recommended will vary between individuals. There needs to be a discussion around what you want to happen in various scenarios such as inability to work or death of the primary income earner. These conversations are often raw and sobering but a necessary part of determining the appropriate amount of cover.
Several considerations that usually affect the cover required include:
How much debt do the family have?
Who is the primary income earner?
How old are the children?
What is the current standard of living and does that need to be maintained?
An insurance professional can recommend the best way to structure the cover factoring in things such as tax deductibility, taxation of benefits, superannuation release rules, cashflow and erosion of retirement benefits.
Just like investment risk appetite can change based on age and life-stage events, personal insurance cover should be examined to keep up to date with your changing situation throughout your lifetime. Having the appropriate cover in place leads to another intangible benefit…peace of mind.
My clients who put in place personal insurance cover, hope that they never have to call upon it. But if they do, they are always grateful they took the time to set it up properly.
Written by David Nimmo
Oracle Sydney City
- Dr Jeffrey Scott, Head of Advice Strategy at MetLife Australia – 11 October 2021.
- APRA – Final individual disability income insurance sustainability measures – 30 September 2020.