Income Protection Insurance

5. Key terms to understand in your income protection insurance cover

1. Waiting period – the period of time you need to be unable to work before you can start receiving benefits. The waiting period is usually between 30 days to 90 days.
2. Benefit amount – the percentage of your pre-disability income that you will receive as benefits during the coverage period. Typically, it ranges from 70% to 75% of your pre-disability income (usually) plus Super contribution.
3. Benefit period – the duration for which you will receive benefits after the waiting period ends. It can range from a few months to several years, depending on your policy. Most policies are between 2 years to 5 years and sometimes to retirement age e.g., 65 years.
4. Offset clause – this is a key clause that allows the insurer to reduce the benefit payable to you, on the basis of other sources of income such as Workers Compensation or Motor vehicle accident weekly benefits
5. Exclusion – certain conditions or situations that are not covered by your policy, such as intentional acts (self-harm). It’s important to understand these exclusions and get advice when necessary.
6. Occupation definition – identifies the level of disability required to qualify for benefits based on your occupation. IP is usually offered as “any occupation” (cover unable to perform any job). “Own occupation” cover is sometimes available to professionals (unable to perform a job you are qualified for).

All new Indemnity policies had to comply with the following:

1. Income replacement ratio restricted to 70% of income, excluding superannuation (previously this was up to 75% of income, including superannuation)
2. Other benefits in the first six months of a claim to be restricted to an additional 20% of income, i.e. a limit of 90% overall (previously comprehensive cover could offer up to double the benefit during this period). 
3. Indemnity definition of Pre-Disability Income to be calculated over the 12 months before the claim (previous definitions could use the highest 12 months income in the last 2 or 3 years to reduce the impact of fluctuating income)
4. Long benefit periods, such as to age 65, to be managed to maintain a motivation to return to work e.g. changing from “Own Occupation” to “Any Occupation” definition after 2 years on claim and capability clauses (previously “Own Occupation” cover was available to age 65).

There was another change foreshadowed by APRA which was to restrict policies to being guaranteed renewable for periods no longer than 5 years, rather than for terms of up to age 65 to 70. It is uncertain whether this will continue to be a requirement after APRA granted insurers an extension to implement this measure. 

There had been demands from other parties such as the Actuaries Institute for even more restrictive measures. Also different interpretations of APRA requirements initially led to a range of offerings from insurers.

However with the dust now settled, and after several iterations of the new products, there are many features which are common to the new policies on offer.