They say the only constant in life is change.
This financial year I have read more articles, joined more webinars and closely monitored more legislation than any other year. With all of this industry change in the works, next year looks to be the beginning of an improved world of advice.
The many internal and external shifts are largely positive. They will allow us to focus heavily on our commitment to serve the public effectively and transparently. That’s a world I can be proud to call my own!
The most important question is – how does all of this change affect you?
I consider it an integral part of my job to keep my clients away from the white noise and allow them to focus on their long-term goals with
Today I am making an exception.
Income Protection changes
Last week I attended a conference on Income Protection changes due to take effect in October this year.
I am not going to bore you with all of the details, but the headline is that Income Protection policies purchased after this date will be largely inferior to current ‘at market’ policies.
I am going to use my own policy as an example.
My policy is what us industry nerds call ‘bells and whistles’ cover. I took out the highest level of cover available to me back in 2014, with all the extra benefits, like Rehabilitation and Nursing included.
It makes sense that a Financial Adviser would take out the best cover, we see these policies protect clients at the worst times in their lives; yet when major legislative changes come into play, I need to seriously consider the impact it will have on my own situation.
As you can see, after October my opportunity to take out a different policy, as comprehensive as the one I have now, will be long gone.
Let’s Talk About Why
There have been whispers for several years now that the sustainability of insurance, particularly Income Protection, would soon become a major problem.
What we know for sure is that most insurers don’t make a profit on this type of cover.
Why should we care about insurance companies’ bottom line you ask? The truth is – we care because it affects us. If you have noticed your premiums increasing rapidly over the years, then you will know it is starting to affect you.
Logically, insurers are going to increase prices once they stop making money on a product. As much as it pains me to admit, they hardly have a choice in that decision.
Claim statistics have been through the roof for a long time now and they need to have the funds available to them to meet their responsibility to pay claims. That is why we pay for cover after all!
If you consider a 34-year-old who took out a ‘to age 65’ policy in 2016 and suffered permanent disablement the following year, the reality is that their insurer has an obligation to continue to pay them each month for over thirty years, assuming their claim is valid.
APRA has been standing at the sidelines for some time now waiting for one of the big insurers to start documenting plans for a more sustainable Income Protection structure. Sadly, all of the insurers sat still, scared of suffering from the ‘first mover disadvantage’. So, the powers that be just kept waiting…until we landed here.
APRA have now had to step in and tell the insurers that enough is enough. The 1st of October is their deadline to offer reduced benefits policies and do away with the bells and whistles that are making our policies unaffordable and unsustainable.
The good news is that if, like me, you have an existing policy in place that meets your needs, that policy will remain in force, in all of its never to be seen again glory.
The bad news? Your existing policy is likely to get hit with premium increases year on year, which will make you reconsider its value each time you see that direct debit come out.
Should you change your Income Protection policy now, while the comprehensive policies remain on offer, or should you consider reduced benefits after 1 October?
The answer is something I have heard a lot during all these recent webinars and conferences. It depends!
Early indicators show that the soon-to-be-released policies will not save you much money in the initial years. My hopes that dropping benefits and insurance levels could half the cost of cover for my clients have been somewhat crushed by the reality that these ‘New Generation’ policies, as we are calling them, obviously have no claims statistics. It would be remiss of insurers to hand them out for bargain prices, at least until they can truly calculate the new ‘cost of business’.
If you don’t have an Income Protection policy in place, or you have cover that is unsuitable based on your situation, now could certainly be a good time to discuss your options, which of course will be somewhat limited later in the year.
If you are looking to save money on your insurance over the long term and you are not concerned with a lower level of cover, the inferior policy options available after the 1st of October may just suit.
If you have an existing policy that you are happy with, you might want to hold on to it for dear life, or reach out for advice on how to tweak the benefits to make it more affordable.
Whatever your thoughts are, there is one thing I am certain of…
There has never been a more important time to discuss Income Protection.