Important changes to Income Protection Policies

Since April 2021 Australian insurers have all stopped offering Agreed value Income Protection (IP) cover in response to the regulator, APRA’s, requirement to do so.

This change was forced on the industry in response to widespread and continuing industry losses and resulting substantial rises in premiums. Losses arose from generous policy terms leading to increasing claims and unsustainable competition between insurers. Low interest rates and increased capital requirements have also impacted insurer profitability.

All new IP policies must now be issued on an Indemnity basis only, which means the policy owner (normally the insured person), must provide evidence of income to support the insured monthly benefit at the time of a claim.

These policies are more restrictive than the previously available Agreed value contracts, as proof of income for these policies is generally based on actual income (rather than the agreed sum insured), in the prior 12 months before a disability (illness or injury) occurs.

In some cases, an insurer will take the best 12 consecutive months of income, up to 36 months prior to the disability. This can be important if the insured’s income was down in the most recent 12 months for some reason, such as coronavirus impacting hours worked.

There will be some further significant changes that happen no later than October 2021. Most insurers are still designing their new IP contracts, but these may be implemented before October. These contracts will be even more restrictive than policies currently available and much more restrictive than the Agreed value policies that were offered prior to 1 April 2020.

For example, insurers will require evidence of income at the time of claim based solely on the 12 months immediately prior to disability (rather than the highest level over the previous 3 years as sometimes applies now). There will likely be extensions available to this restrictive time frame for periods of unpaid leave (such as parental leave) of up to 12 months.

The benefit amount under the new policies from later this year may also be limited to less than the maximum 75% of pre-disability income that typically applies under a current Indemnity policy.

Also, under the new rules being imposed by APRA, the definition of disability will become more restrictive for longer-term claims thus reducing, or potentially eliminating, many long-term claims.

While it is unlikely most people would ever be on a long-term claim, if you were unlucky and this happened, then the possibility that your benefit would be reduced or even stopped before your expected retirement age (most IP policies we recommend are based on a benefit being payable up until age 65) is an obvious negative.

Another significant change from October 2021 will be that new policies will not be guaranteed renewable, which provides that the terms and conditions of the policy cannot be altered to the detriment of the insured, provided the insured continues to pay the premium and does not let the policy lapse.

New policies from October will only have a five-year guaranteed renewable term, at which time the insured can elect to continue the policy for another 5-year term based on the policies available at that time. While the policy renewal will not require the insured to be medically underwritten, the insured will need to provide information relating to their current occupation, income and pastimes.

Depending on individual circumstances at that time, the sum insured may be reduced, the occupation rating may be changed, leading to higher premiums, and new exclusions may apply to higher risk pastimes.

The proposed changes have one positive in that they should make premiums on the newer, more restrictive policies, more affordable going forward. This helps everyone but to the detriment, in some cases, of those making a claim. In practice, this means that people insured under the new policies should make more provisions for their own expenses (living expenses, mortgage repayments, retirement savings, etc) in the event of illness or injury as in many cases their Income Protection insurance won’t provide the same level of protection.

Feeling safe is the most important liveability attribute for Australians.

Demographic experts, Informed Decisions (.id) has identified ‘Feeling safe’ as the most important attribute that Australians believe contributes to making somewhere a good place to live.

The 2020 Ipsos “Life in Australia” Survey reported that 72% nominated it among their top five liveability attributes, well ahead of the next most important aspects – ‘affordable decent housing’ (51%) and ‘high quality health services’ (48%). ‘Access to the natural environment’ (47%) and ‘a diverse range of shopping, leisure and dining experiences’ (33%) were the 4th and 5th most important attributes.

Pretty much everyone places a high value on ‘feeling safe’ and most Australian residents feel their local government area is safe irrespective of where they live.

“Residents of the nation’s inner-city and middle suburban LGAs felt most safe, rating their local area an average of 7.3 out of 10 in that regard. People who call the outer suburbs home rated their local area an average of 7.1 out of 10, whereas those who reside in the fringe & peri-urban areas felt least safe (relatively speaking) – scoring their local area an average of 6.8/10. From a regional perspective, small town and rural area residents felt most safe, scoring their local area an average of 7.6 out of 10, closely followed by those who live in a regional coastal area (7.5). Residents of larger regional centres (7.0) felt less safe, on average”.

Bitcoin – is it a genuine investment?

Bitcoin has been attracting an increasing amount of interest, mainly from speculators but to some extent from institutions, as they see an opportunity to profit from the herd moving in.

Bitcoin and other cryptocurrencies such as Ethereum, Ripple & Dogecoin have risen in price enormously over recent years, though they have been very volatile with falls as great as 20% in a single day.

The huge increase in trading of cryptocurrencies is attracting institutions to set up ETFs (exchange-traded funds) and provide trading mechanisms. Coinbase, which helps people buy and sell cryptocurrencies, listed its stock publicly last week; it’s built to trade “money” that exists only as lines of computer code. This business, which is the dominant digital currency exchange and collects a fee on trades, was initially valued at nearly $100 billion! Clearly many people expect trading volumes to continue to grow strongly.

I find it difficult to explain Bitcoin and other cryptocurrencies or see the case for their valuation and therefore regard them as more of a speculative tool (akin almost to betting at the racetrack or casino) rather than an investment, but they can’t simply be dismissed as a speculative bubble, like Dutch tulips. With Bitcoin, while the price has suffered some serious declines at various times, each time it has reinflated. Typically speculative bubbles inflate and then collapse forever.

It is impossible to value Bitcoin, unlike a traditional investment such as property or shares in a major business, as it has no intrinsic value and unlike banknotes (fiat currency), it has no Government standing behind it.

As a purely digital asset, its price is essentially what true believers are willing to pay for it. It seems that Bitcoin is viewed as an “anti-fiat” asset so when people lose faith in the long-term value of the currency, perhaps because they think Government is issuing too much debt, bond rates rise, and they buy Bitcoin. To some degree, the same happens with gold, though it has some intrinsic value given its use in jewellery and other applications.

In summary, I don’t think Bitcoin should be regarded as an alternative for traditional investments given that it’s price seems to be largely a function of there being more and more people willing to buy it in expectation of further price rises rather than some intrinsic value being created.

Also, its continued susceptibility to massive crashes makes it unsuitable as a means of exchange (useful for purchasing goods and services), while ensuring that it continues to be an unreliable store of value.

Nevertheless, many people have made big money from Bitcoin and some other cryptocurrencies and there may be more money to be made if enthusiasm for this very different asset continues to grow.

Fear of missing out (FOMO) is attracting new buyers but buyers and existing holders should be aware of the potential for losses, particularly if Governments decide to restrict its use or tax it. Buyers should also be aware that if they are hacked there is generally no one to turn to that can help recover your stolen bitcoin.

Will NZ property investor tax reforms crash prices & are there implications for Australia?

New Zealand’s Ardern Labour Government recently announced sweeping property tax reforms targeted at investors and aimed to tilt the market in favour of first home buyers, namely:

  • extending the term of the “bright line test” for taxing capital gains, at marginal tax rates, on investment property sold with 10 years; previously this was 5 years; and
  • fully removing the tax-deductibility of mortgage interest payments on residential investment properties.

The changes will apply to all future purchases and will be extended to include all investment properties from 1 October 2021, phased in over the following four years. Surprisingly, the New Zealand Government has not grandfathered existing property investors from its changes to interest deductibility. It has also just implemented LVR restrictions on investor mortgages to cool what is considered an overheated property market.

Westpac has released research projecting that the removal of interest deductibility for investors may trigger house price falls of more than 10% in short term, and around 10% in longer term as they sell to owner-occupiers. Removing interest deductibility tilts the balance dramatically in favour of homeowners, which is the intent of the policy changes.

These changes in New Zealand are unlikely to be replicated in Australia in the near term given the popularity of negative gearing (particularly among politicians, many of whom own investment property) but if they prove politically popular in NZ then something similar could happen in Australia at some future point.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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