These two articles provided by BT consider ‘home duties’ definitions and choosing between level and stepped premiums…
Insurance for Multi-Tasking Parents: There’s More to it Than You Might Think
Changing work and social patterns have resulted in life insurers offering policies that meet the needs of people juggling work and home life.
While newer style home duties policies may seem to offer an easy solution for the protection needs of homemakers, as Rachel Leong from BT Financial Group writes, advisers should also consider other options.
This is particularly the case if someone works part-time or may be planning a return to work in the near future.
The correct policy option will ensure clients are set for the present and the future, according to Rachel.
Increasingly, parents are juggling both work and home duties, which means there are particular considerations for risk advisers looking for strategies to meet the needs of this diverse client segment, during different life stages.
In Australia, the role of the homemaker – someone who manages the home – still tends to be predominantly performed by women. However, increasingly we are seeing a trend where more women are taking shorter career breaks and returning to the workforce sooner after having children or working part-time. Out of all working Australians, 21.8% are women working part-time.
There are a range of life insurance policies suitable for people that now fall into the category of ‘homemakers’, whether they be stay-at-home parents, part-time workers, or employees on a break before returning to the workforce.
‘Home duties’ policies
Most retail insurers offer specific income protection and total and permanent disability (TPD) policies for clients performing home duties. Generally, they are aimed at individuals who are wholly involved in performing home duties, or those that engage in less than 20 hours of paid work per week.
The underlying definitions are aligned with day-to-day tasks carried out by a stay-at-home parent. For example, to be eligible for income protection benefits, a common requirement will be that due to a sickness or injury, the individual will be unable to perform normal household duties (such as cooking, cleaning, washing clothes, shopping, and caring for children) and are under the regular care of a doctor. Similarly, for TPD policies, the usual requirement would be that the individual has been unable to carry out normal household duties for a period of time (eg, 3 months), and they are unlikely to be able to do so again in the future.
If your client works 20 hours or more per week, then they will generally be eligible for occupation-based cover, which has more expansive coverage than home duties cover. TPD cover can be based either on their current occupation, or any occupation for which they are generally suitable (based on their career history). Where the TPD policy is held outside superannuation, a broader definition allows the possibility of a claim if the insured person is still able to work but is employed in a role that pays less than 25% of their previous earnings.
Home duties vs occupation-based cover
As the ability to access certain types of policies is determined by the client’s hours of work, often it is not a choice as to whether a home duties or occupation-based policy can be offered – it is one or the other. However, when a client is planning on taking a break from the workforce or wholly assuming responsibilities in the home, this raises the question as to what type of cover should be recommended, given that hours of work may change in the future.
Acquiring cover during pregnancy
For life and trauma benefits, unless there has been a history of complications, cover will usually be considered at standard rates. Therefore, unless there is a history of serious medical complications, pregnancy should not be a factor in determining whether cover is available.
For TPD benefits, like life and trauma, unless there has been a history of complications, cover will usually be considered at standard rates. However, if the client is more than 30 weeks’ pregnant (or, for some insurers, defined as being in the third trimester) then attaining cover may be more limited. Some insurers will not approve TPD under an ‘any occupation’ or ‘own occupation’ definition, instead requiring the policy to be issued with a ‘home duties’ TPD occupation. Others may not offer cover or will defer a decision until after the birth.
Depending on the insurer, Income Protection cover is usually available for employed expectant mothers up until the 30th week of pregnancy or up to the third trimester. Once past this point, most insurers will not offer cover and will defer a decision until after the birth and the mother has returned to employment. What should be noted is that if a client obtains occupation-based income protection cover, and subsequently goes on maternity leave, this may impact the ease of, and ability to claim.
Therefore, if given the option, what is the most appropriate form of cover: occupation-based or home duties cover? As occupation-based cover provides broader definitions, if available, this is the preferred type of policy. This will mean that when your client returns to work, they will have the appropriate type of cover in place already.
Protecting your client’s children
The importance of ‘Child Cover’ can often be highlighted though one simple question: “Would you like to be able to stop working and care full-time for your child if they were to fall seriously ill?” The answer would be unanimous. Therefore, while it’s easy to demonstrate the need, it can often be a difficult discussion for advisers to have with parents. This is why many insurers include $10,000 free child cover when an adult trauma insurance (also known as ‘living insurance’) policy is purchased. However, this will not cover a parent’s salary for a material amount of time and, therefore it’s an important point to raise.
When considering insurance for homemakers, attention often falls on policies which incorporate home duties definitions. While these have a role to play, many clients may qualify for other policies which are better suited to them in the future, such as occupation-based cover. In addition, it is important not to forget that women are spending less time out of the workforce than ever before to raise families, and that this only relates to one life stage. Smart strategies can ensure comprehensive cover that changes and adapts over their lifetime.
Rachel Leong is a Senior Manager – Product Technical for Life Insurance at BT Financial Group
University of Queensland researchers Janine Baxter and Belinda Hewitt note that Australia still has a strong male-breadwinner institutional framework. (Negotiating Domestic Labor: Women’s Earnings and Housework Time in Australia, November 2012).
 Workplace Gender Equality Agency: Gender workplace statistics at a glance, February 2018.
Choosing Between Level and Stepped Premiums
Stepped versus level premiums is a conversation advisers should have with every client when considering long term life insurance cover.
Choosing which is better is more than an economic consideration and depends on the needs of the client.
In this article, Crissy Demanuele from BT Financial Group explores a number of options for advisers, including when total level premiums can be less expensive than total stepped premiums.
Life insurers generally offer clients the choice to have either level or stepped premiums, or a combination on their policy. The type of insurance premium structure will affect the initial cost as well as the total cost over the lifetime of the policy.
To maximise savings for clients, it’s important to determine first, from the beginning of the policy, how long cover will be required. The duration of the cover may help to determine the appropriate premium structure for a client to consider. Sometimes a stepped premium structure is more suitable for a client, while at other times a level premium structure can lead to a lower cost overall.
Stepped premiums increase as the client ages, to reflect the higher likelihood of a potential claim. Stepped premiums have lower upfront costs over the short term. However, if the client continues to hold their policy, as they age, stepped premiums increase – sometimes significantly. This means the total premium cost over the lifetime of the policy can be significantly higher compared to level premiums, if held for a long period.
Level premiums can provide clients with peace of mind as they are designed to remain stable. Premiums remain stable from policy commencement until the client reaches a predetermined age (e.g. level to age 55 or age 65), at which point the premium converts to a stepped premium structure. There may be increases to level premiums over time due to indexation or other increases to the sum insured. In addition, level premiums may change if the underlying assumptions and/or expenses of the insurer have changed since policy commencement. However, any premium changes will usually be made across the board – with stepped premiums changing as well.
Level premiums usually have higher upfront costs than stepped premiums at policy commencement. This is because the increased risk of claim as the insured person ages has been factored in, with premiums being averaged over a period of time.
Joshua, an accountant (non-smoker), obtains $500,000 of Term Life and $300,000 Living Benefit Plus cover at age 30. The table below shows the difference in the premiums paid at age 30, 45 and 55, under a stepped and level structure.
|Age 30||Age 45||Age 55|
|Level premium to age 65* (no indexation of sum insured, policy fees or increased premiums)||$1,217.56||$1,217.56||$1,217.56|
* BT Protection Plans annual premium rates as at 11 September 2018
It’s important that the correct cover and policy structure is in place at the start of the policy, as replacement policies can result in level premiums being recalculated based on the insured person’s age at the time of the amendment. Replacement policies may be required if there is a definition change (e.g. indemnity to agreed-value income protection contract) or there needs to be an ownership change (e.g. moving from a personally-owned policy to a super-owned policy).
Some policies allow clients to retain their entry age premium rates, even if they need to cancel and replace their cover at a later date.
True Level Premiums
There is also a variation to level premiums described as ‘true level’ in the industry. Under a true level premium structure, the additional premium charged each year due to indexation continues to be calculated at the age of the insured person at inception of the policy. Under a standard level premium structure, the additional premium is based on the insured person’s age when the increase occurs, which is generally more. However, standard level premiums reflect the increased risk to the insurer more accurately as the insured person ages and is therefore more sustainable. The risk with true level premium policies is that they may be more susceptible to re-pricing in the future.
Some retail insurers also provide the option of a hybrid premium structure that allows the client to use stepped premiums for a portion of cover, together with level premiums for the remainder of cover. This allows the premium structure to be aligned to short-term or long-term needs within a single policy.
When Are Level Premiums More Cost Effective than Stepped Premiums?
The point at which accumulated level premiums are lower than accumulated stepped premiums depends on the actual premium payable. To properly assess this, advisers can help to provide clients with comparisons. This break-even point will be affected by:
- the type of policy
- the age of the client (the break-even point is likely to be later when the client is younger)
- the age that level premiums will cease (e.g. level to age 65)
- the indexation of the sum insured
- any premium loadings due to substandard health, pastime or occupation, and
- any additional policy options that have been added to the policy.
Below is an illustration that compares accumulated stepped and level premiums (to age 65) for Matthew, a 30-year-old male accountant with $500,000 indexed Term life and $300,000 Living Plus cover*.
In this example, it takes 20 years for accumulated level premiums to total less than accumulated stepped premiums.
However, if Matthew is aged 45 at commencement of the policy, it would take 13 years to reach the break-even point, as shown below*.
Generally speaking, if the client holds the insurance policy for a short period, it will be more cost-effective under a stepped premium structure. However, if the client holds the policy for the longer term, it may be more cost-effective under a level premium structure.
Locking in level premiums at commencement can give the client peace of mind, knowing that their premiums will not significantly increase over the life of their policy, unless alterations are made. Generally, the older the client is at the commencement of the policy, the sooner they will reach the break-even point between stepped and level premiums.
*BT Protection Plans annual premium rates as at 11 September 2018
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