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.