MetLife’s Dr Jeffrey Scott shares with advisers an excellent summary of five key factors that should be taken into account when deciding which income protection insurance products will deliver the right solution for your clients following the raft of changes to IP products that were implemented in October 2021…
The recent introduction of APRA’s Individual Disability Income Insurance (IDII) measures has seen a raft of product changes in the market, with some Income Protection (IP) products becoming significantly more competitive.1
With so many insurers updating their retail IP products at the one time, it can be quite confusing to compare all the new products and variations, to assess what’s right for the client.
To make this process easier, MetLife Australia’s Jeff Scott, Head of Adviser Strategy, suggests five key factors financial advisers should consider when assessing which products best suit their clients’ needs:
- Benefit offsets
Depending on the retail IP policy selected, the monthly benefit paid to the life insured (or policyholder) may be reduced by other deemed income. This deemed income has the potential to significantly reduce the monthly benefit paid. As each life insurance company has different benefit offsets, financial advisers should familiarise themselves with the differences between each company.
Benefit offsets may include, but are not limited to: income from personal exertion, income earned in the conduct of the business, unaffected business income, the share of income and profit that continues from a business, sick leave, long service leave, annual leave, workers compensation, consumer credit insurance benefits, disability support pension, other social security payments, interest, dividend or rent, other investment income or capital gains, ongoing contractual royalties or annuities, other similar recurrent income and other income replacement insurance.2
2. Replacement ratio
APRA’s IDII measures state that up to 90% of pre-disability income could be replaced in the first 6 months of the benefit period, and up to 70% of pre-disability income thereafter.3 Financial advisers should be aware that not every life insurance company has adopted the same approach, and some products have a replacement ratio below 70% (say, 60%), at a particular age (for example, age 60), or after a particular duration on claim (such as, two years).4
3. Income tiering
While the indicative replacement ratio as stipulated by the APRA IDII measures is no more than 70% after the first 6 months on claim, some companies may have adopted a tiering approach.5
Companies that do not have income tiering provide a simple 70% income replacement ratio up to a maximum monthly benefit (for example $30,000 per month). This would result in a client being able to obtain a 70% replacement ratio for income up to approximately $514,285 which could produce an annual benefit of up to $360,000 per annum. Income tiering reduces the replacement ratio below 70% for customers on higher incomes (usually above $250,000). For example:
In the above example, if a customer earns $500,000 per annum, then the replacement ratio with income tiering will be 53.6% ($268,000 per annum) – and any client who earns more than $240,000 per annum will never have a complete 70% of their income covered. Alternatively, the same customer that owns a policy without income tiering would have an annual benefit of $350,000 paid while on claim (70% replacement ratio).
Financial advisers should check with each insurer to determine if income tiering applies and how this may affect their clients at claim time.
4. Usual occupation vs any occupation
Most insurers assess the life insured’s ability to work in gainful employment based on their usual occupation (also referred to as ‘own occupation’) at date of disablement. However, some insurers amend this criteria to an ‘any occupation’ definition once the customer has been on claim for a defined period of time (often 2 years).6 The “any occupation” definition of disablement examines the ability of a customer who is on claim to perform any reasonable occupation the customer is able to perform based upon their previous education, their previous experience, their previous training and any other reasonable training. Changing the assessment criteria for a customer on an income protection claim from an “own occupation” to an “any occupation” definition is likely to cause uncertainty and anxiety with customers, as the more restrictive “any occupation” definition may restrict claim payments to the customer, even if they are still incapable of performing their usual occupation.
5. Long-term benefit payments
APRA provided a list of recommendations on how insurers could manage the risks associated with long-term claims but was not prescriptive. Instead, it encouraged insurers to explore various options to actively manage the risk. In addition to the shift from own occupation to any occupation, and the reduction in income replacement ratio discussed above, financial advisers should be mindful of:
- Introduction of capability clauses: This means that where the life insured’s treating medical practitioner (or medical specialist) state they have the ability (or capability) to return to their usual occupation, but the life insured chooses not to, then the insurer has the ability to reduce the monthly benefit payment by the proportional number of days they could have worked. This is a way for insurers to actively manage the risks associated with long-term claims without disadvantaging those who are still legitimately disabled after a particular duration.
- Rehabilitation and retraining: It’s important that insurers don’t just pay retail IP claims, but actively help clients return to health, wellness, and work through the use of appropriate rehabilitation and retraining programs. Some insurers provide health programs from policy inception to allow clients to take an active role in their own health and wellness. These programs serve to create fitter, healthier, happier clients who are less likely to go on claim, and if they do become sick or injured, they are normally on claim for a shorter period – reducing the long-term risk to insurers and overall premiums to policyholders.7
With the numerous changes to retail IP policies, financial advisers must understand both the benefits and restrictions associated with these policies to meet their best interest duty to their clients. MetLife has created a market-leading IP product which achieves a balance between meeting APRA IDII measures, allowing advisers to meet their best interest duty, and providing sustainable benefits and features that are valued by clients.
1 APRA – Final individual disability income insurance sustainability measures – Wednesday 30 September 2020. https://www.apra.gov.au/final-individual-disability-income-insurance-sustainability-measures
2 Actuaries Institute – Reference Product – Individual Disability Income Insurance – Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021.
3 APRA – Final individual disability income insurance sustainability measures – Wednesday 30 September 2020. https://www.apra.gov.au/final-individual-disability-income-insurance-sustainability-measures
4Actuaries Institute – Reference Product – Individual Disability Income Insurance – Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021. https://actuaries.asn.au/Library/Reports/2021/IDIIDocumentC2.pdf
5 Actuaries Institute – Reference Product – Individual Disability Income Insurance – Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021. https://actuaries.asn.au/Library/Reports/2021/IDIIDocumentC2.pdf
6 Actuaries Institute – Reference Product – Individual Disability Income Insurance – Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021. https://actuaries.asn.au/Library/Reports/2021/IDIIDocumentC2.pdf
7 Teledoc Health – Creating a new kind of healthcare experience with greater convenience, outcomes, and value – Retail – May 2020; Teledoc Health – Forum 2021: Key insights from the community advancing virtual care – https://assets.ctfassets.net/l3v9j0ltz3yi/4tn7aTAJu6iTiFld3y3YBZ/867a4c5ed84c29888cd845c4e26cc79c/Forum_2021_eBook.pdf; Teledoc Health -Integrated mental healthcare services for vulnerable populations – https://assets.ctfassets.net/l3v9j0ltz3yi/7vNmjSqvCsFM5V5M3S7jvw/84f3535e2b4a6033d5889b78d0e0a7f1/CareSourceClientSuccessStory.pdf; Teledoc Health -THE ACCELERATION OF VIRTUAL CARE: Why solutions that connect the mind and body are critical – By Dr Julia Hoffman – https://assets.ctfassets.net/l3v9j0ltz3yi/3r3ePrXkmp5Nc4DbDq2zMs/accf70a13510d579709599db117a3935/Why_Solutions_that_Connect_the_Mind_and_Body_are_Critical.pdf.
Dr Jeffrey Scott has over 25 years’ experience in the insurance industry and is most notably credited for creating the first terminal illness benefit for life insurance products in Australia. He has also lectured on financial planning, taxation, superannuation and insurance at the University of Technology and the University of New South Wales – and is a regular media commentator on these topics, having conducted over 1,000 presentations in 13 countries.
One thing to note with point 4 is that ClearView have actually adopted the approach of assessing a reasonable occupation that you *could* be retrained or rehabilitated to perform. This is concerningly similar to the Australian Super TPD definitions, which mean the insurer could simply say, “Well, we think we could retrain or rehabilitate you to [occupation], therefore we will cease paying benefits.”
Maximus my boy it has always been thus. Any occupation IP definitions, this whether they are in lump-sum TPD today, or in IP some 20 years ago, always gave the discretion to the insurer. There are loads of old FOS cases if one cares to look. The discretion always rested with the insurer, giving them a deeming power over everything. It’s just not Oz super!
For those of us who been around for a while it’s our worst nightmare. Two-year own occupation total disability clauses were de rigueur for everybody but accountants and doctors in the 80s and 90s in the contracts that the big five insurers were offering. Only innovative companies like Tyndall life chose to offer full own occupation for most occupations for the term of disability. We have now gone back to the bad old days.
We are probably going to experience advisers, under pressure from clients with existing contracts paying too much, looking to recommend own occupation IP contracts for just a two years benefit period and then solving the longer term need for income while disabled with lump-sum own occupation TPD. That will require huge TPD sum insureds to create income in a a low interest environment
You mention Clearview. Incredibly, as they issued their 1 October IP contracts, they reversed the gains we’ve had over the last 20 years in own occupation TPD qualifying periods, by very quietly extending their qualifying period from three months back to 6 months. Back to the past, and bugger the future,
Talk about collateral damage. An industry which should be more profitable after jamming up IP premiums, after reducing distribution costs (LIF), has allowed APRA & the Institute to apply a “scorched earth” approach to income protection. Adviser reaction has been, to put it nicely, “rather subdued”. Already some insurers are “improving” their 1 October “market offer” (God how I hate that phrase) just to add to the confusion. Anecdotally I am told IP new-policy new business is ” not what we expected”- read crap.
Funnily enough, the true “stakeholders” in this discussion, Risk Specialist Advisers, WERE NEVER CONSULTED!
Experienced advisers can see a compliance nightmare if they replace an expensive pre-2021 IP contract with a lesser contract packed with severity purely on price, with FASEAs effective communication rule being the real concern. No one wants to be the first spear-carrier for the new Code Monitoring body. So we sit back and wait! And yes we can debate ” clients best interests” ad nauseum.
Jeff Scotts paper is a start. What’s needed is a full blown IP training course. like the one run by the AFA in the 90s.
Old Risky: what is it you would do with products given the “gains we’ve had over the last 20 years” caused the insurers to lose billions of dollars selling IP? The price rises still aren’t enough on those products.
I assume you have some knowledge of the facts of costs of IP spiralling out of control, and the reasons why. So taking that into account, what would you actually do with product?
I believe most have missed the point. This is not a product issue but a ASIC’s research requirement issue that started this race to the bottom. These product changes have not addressed why we arrived at the bottom, so it will happen again.
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