AIA Australia’s Ben Martin argues the case for the insurer’s Term Level premium option, while also reflecting on the potential change in how advisers may engage with their clients around trauma insurance conversations following APRA’s intervention in the IP market

A level premium structure can be a cost-effective way to construct a life insurance policy. This is especially the case if the opportunity cost of paying higher premiums upfront can be tolerated in anticipation of the long-term cost efficiencies garnered.  Unfortunately, the difference in premiums early on can be significant, and often the breakeven point between stepped and level occurs well after inception, making stepped premiums the preferred, or default option from the outset.

The benefits of a Term Level premium

This is where a Term Level premium could help.  Unlike ordinary level premiums, Five-Year Term Level premiums tend to be priced much more reasonably in the initial years of the contract, and in some cases, are priced lower than stepped by the third year of the policy.

If the client wants to continue to be covered beyond the five-year anniversary date they can do so without further underwriting.  At this point the client has the choice to revert to stepped, level or another term level period.  Ultimately, Term Level provides another premium structuring option, even if the need for cover is for greater than five years in duration.

AIA Australia is currently guaranteeing that premiums for lump sum cover will remain fixed, level and set under a Five-Year Term Level structure.  Absolute premium certainty for the first five years of the policy.  It enables client budgetary expectations to be set and eliminates any ad-hoc rate rises after the policy has gone into force.  Above all, it provides you and your clients with an opportunity to control outcomes over the next five years against a backdrop of persisting pricing pressures permeating within the Australian life insurance industry.

A Five-Year Term Level Rate Guarantee structure could be utilised for most lump sum insurance recommendations and will assist a diverse group of clients. The guarantee could provide premium certainty and peace of mind to a client with long-term mortgage debt sitting on the family balance sheet; as the funding mechanism for a successful self-employed co-founder or co-proprietor’s buy/sell insurance policy; or for a client who has provided a financial ‘leg-up’ to their children for the purchase of a first home.

Five Year guaranteed premiums on Crisis/Trauma cover

In the new world of income protection these benefits will be significantly restricted

One of the key measures prescribed by the Australian Prudential Regulation Authority (APRA) is a strict limit on the maximum income replacement ratio which the new generation of income Protection (IP) products can provide. As well as limiting core income protection benefits available under the new products, the  maximum income replacement ratio specified in APRA’s guidelines will have a significant impact on the availability and generosity of the traditional ancillary benefits such as Severity Benefit, Crisis Recovery Benefit, Family Care Benefit which have in the past paid additional lump sum payments or boosted income replacement benefits. In the new world of income protection these benefits will be significantly restricted and for many will simply not be practical under the new regime.

To the extent that it is not already happening, it therefore necessitates a discussion with every client about the importance of having robust Crisis Recovery insurance to counter the risk of financial loss stemming from a chronic illness or injury.  A lump sum injection of Crisis/Trauma proceeds into the family balance sheet could help normalise cash flow during this time and provide a crucial supplement for these next generation IP products.

Chronic medical conditions are prevalent in Australia. According to the Australian Bureau of Statistics, in the period of 2017-2018 almost half of Australians (47%) were estimated to suffer from at least one chronic medical condition.

Last year, Cancer was the leading cause of claim within AIA Australia’s Retail IP channel, resulting in 36% and 22% of IP claims for females and males respectively. IP claims attributable to cardiovascular illnesses made up 12% and 10% for females and males, respectively.

Given these concerning statistics, it is crucial that there is a high level of understanding and awareness about the strong need for a comprehensive wealth protection plan. By highlighting the importance of IP, Crisis, Total and Permanent Disablement and Death cover, we can ensure that the lives and livelihoods of Australians and their families are protected

Ben Martin is a Senior Technical and Training Manager, AIA Australia.

AIA Australia is offering a Five-Year Term Level Rate Guarantee for all lump sum insurance contracts entered prior to 31 December 2021. Please note the rate is still subject to CPI and can be impacted by their AIA Vitality status if these options are included.

After the initial five-year term, clients will receive a loyalty discount of 2.5%, in addition to any other discounts that they may be entitled to if they wish to continue to be protected.

To take a closer look at the numbers and understand how AIA’s Five-Year Term Level Rate Guarantee may be able to be utilised in your practice, click here.

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