In terms of funding our lifestyle expenses and accumulating wealth, one of the biggest resources is our capacity to earn an income.
Although, this income-earning capacity can sometimes be taken for granted.
When we are feeling fit and healthy, we may think we are less likely to experience an unexpected financially adverse event, than others.
For example, being unable to work for a period due to a sickness or injury:
Importantly, this ‘optimism bias’ can affect whether or not we put in place a safety net, for example, insurance, to protect us from such an event. As it stands, 33% of Australian workers have income protection insurance#.
Income protection (IP) insurance
General overview (exceptions apply)
A core provision of IP insurance is providing us with an ongoing monthly benefit payment in the event we are unable to work for a period due to a totally disabling, or partially disabling, sickness or injury.
We receive the benefit payment after satisfying the waiting period (e.g. 90 days, 2 years, etc.) and the claim definition (e.g. own occupation, home duties, etc.) entered into with the insurer when cover was established.
How long we receive the benefit payment depends on whether we continue to satisfy the claim definition. And, the benefit period (e.g. 2 years, to age 65, etc.) entered into with the insurer when cover was established.
The benefit payment is calculated from our pre-disability earnings. And again, how our pre-disability earnings are calculated depends on the benefit type entered into with the insurer when cover was established.
There are two key benefit types, indemnity and agreed value, and the main difference between the two is:
The benefit payment is usually up to 75% of our pre-disability earnings. However, insurers may pay up to 85% (75% paid to us directly and the remaining 10% paid to our super account as a super benefit).
Also, depending on our pre-disability earnings, the benefit payment can be capped. And, the benefit payment can be reduced where there are other sources of income present (e.g. another IP insurance benefit payment).
The reason for these limits (%, $, etc.)? IP insurance, and the benefit payment payable, is there to help us with the financial stress associated with being unable to work, so that we can focus on recovery and return to work – not to provide us with a financial disincentive to return to work.
Australian Prudential Regulatory Authority (APRA) measures
APRA has released several measures*^ aimed at improving the long-term sustainability of individual (not group) IP insurance, for the benefit of both insurers and policyholders.
The measures that we cover below have been broken down into four main groups:
It’s important to note that with some of the aforementioned measures, APRA has advised that they are seeking feedback from the industry on specific design details – but not necessarily on the direction of their expectations.
Lastly, these measures shouldn’t impact the IP insurance contracts of existing policyholders, unless their current policy ceases and needs to be replaced.
Despite the measures released by APRA, for many of us, IP insurance can still form an integral part of a comprehensive personal insurance plan – life, total and permanent disability (TPD), IP and trauma insurance.
A comprehensive personal insurance plan can’t prevent unexpected financially adverse events from occurring. However, it can help to protect us from the financial risks associated with such events, if they were to occur.
Please consider watching our animation, ‘Personal insurances: Managing risk’, to learn more on this.
Lastly, when looking to establish or review your personal insurances, please remember we are here to help.
If you have any questions regarding this article, please do not hesitate to contact us.
*The Institute of Actuaries of Australia. (2000). Interim Report of the Disability Committee.
^The Institute of Actuaries of Australia. (2015). Actuaries Summit: Super, Life and General meet at the Crossroads.
#Rice Warner. (2017). Underinsurance in Australia 2017.
#Australian Government, APRA. (2019). Sustainability measures for individual disability income insurance.