Recent data shows just how much income protection payouts cost insurers. According to figures from the Financial Services Council, in FY20 insurers paid out $4.3 billion to consumers with income protection or disability income cover.
In light of the huge volume and cost of claims, insurers have redesigned income protection insurance products to ensure they still make commercial sense, with policyholders no longer able to take out cover that provides a payout for an agreed value. This will help stem the losses insurers were experiencing as a result of claims made through income protection insurance policies and also help to avoid steep rises in the cost of premiums.
Steadfast Life CEO Darren Conway says small business owners should expect further changes to this type of insurance in the future to ensure policyholders get the cover they require and to ensure income protection policies are economic for insurers. For instance, changes may be on the cards for cover income protection provides around mental illness.
“There’s potential for claims related to mental illness to be capped in policies. For instance, policies may only pay out for a certain time period, for instance two to five years, to help reduce the downside for insurers,” he explains.
Another option may be to place age restrictions on cover. For instance, while the gold standard is for policies to provide cover to age 65, in the future policies may be available that only provide cover for five years or less.
“We might see a shift in benefit periods, to help make this type of insurance more attractively priced for consumers. This might also prompt insurers to take a look at insurance policies that cater to permanent disability. Some products may be merged into one as opposed to having multiple products to cover a scenario,” Conway says.
“Insurers have redesigned income protection insurance products to ensure they still make commercial sense”
He expects to see new income protection and other insurance products to enter the market over the next 12 months in light of these changes. But ratings agencies may be a stumbling block. Insurers typically design policies to attract the highest possible rating, given insurance brokers rely on these ratings when making recommendations to clients about products.
“Insurers have built income protection insurance policies to include lots of different features and options to make them attractive. But this has culminated in losses for insurers. So they need to be more circumspect when designing products so they are sustainable, not just to attract the highest possible rating.
”Despite changes in income protection insurance, Conway says it’s still a good idea for small business owners to have income protection in place given they usually don’t have access to sick leave, as this case study demonstrates.
One Steadfast Life client, a single mum with two kids and a self-employed owner of a beauty salon, suffers from a degenerative eye condition and sadly went blind at the age of 33.
Thankfully, she had an income protection policy to age 65, which has been paying 75 per cent of her pre-disability earnings for the last five years and which will continue to support her and her financial dependants long term. She was also supported by a trauma policy, which Steadfast Life advised her to acquire.
Blindness is a trauma event and the policy paid out $200,000 and allowed her to seek specialist treatment with no out of pocket costs and make modifications to her home environment to cater for her circumstances. Having appropriate waiting periods is a good way to manage the cost of premiums. Choosing a policy with a 14-day or 30-day wait will result in a much higher premium than a policy with a 60-day or 90-day waiting period.
If you choose a longer waiting period, don’t forget to put aside a cash buffer to tide you over if you do fall ill, as a way of self-insuring for a couple of months. That's a good strategy for business owners.
Says Conway: “If you have a number of employees in the business, you may also want to buy income protection on a wholesale basis to access discounted pricing. That’s also a way to ensure you and everyone in the business can have the right cover in the event one of your team members is sick or injured and can't work.”
You should consider the Product Disclosure Statement (PDS) in deciding whether to buy (or continue to hold) income protection insurance and also whether this insurance is appropriate for you. The PDS can be obtained from Steadfast Life Pty Ltd (ACN 111 380 388, AFSL no. 421904). Various insurers issue this insurance.
Important note - the information provided here is general advice only and has been prepared without taking in account your objectives, financial situation or needs. Steadfast Life Pty Ltd (ABN 81 111 380 388, AFSL 421904)
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