AIA IP CORE Update – Best Interests Challenge

AIA Australia has released an update to its Priority Protection range this week, in which the main enhancement surrounds an extension to the premium guarantee within elements of its IP CORE product offer.

The enhancement will see the underlying premium rate guarantee period for IP CORE clients selecting two and five-year benefit periods extended to the first five years of the contract. All other IP benefit options will continue to guarantee premiums for two years from commencement.

Client best interests

One of the key issues …relates to the challenges faced by advisers in serving their clients’ best interests

One of the key issues associated with this move by the insurer relates to the challenges faced by advisers in serving their clients’ best interests. Specifically, this applies to the question of whether the best outcome for the client rests in selecting an income replacement benefit period through to age 65 or opting for a more affordable two or five-year benefit period.

There always exists a possibility that a claimant will remain totally disabled following the completion of a two or five-year claim benefit period, which is why so many advisers start from a position of recommending a benefit period to age 65 in order to cover all possibilities – and in doing so, ensure they are serving their clients’ best interests in the short, medium and long term.

…a growing number of advisers are recommending shorter benefit periods

According to AIA, however, a growing number of advisers are recommending shorter benefit periods as they balance, in consultation with their clients, the relative merits associated with paying lower premiums for a more limited claim benefit period. The ‘opportunity cost’ or trade-off applying to premium savings for two and five-year benefit period options is that clients will have more disposable income available, on average, each year, to offset the rising cost of living and meet higher minimum monthly home loan repayments being experienced by many Australians during this current economic cycle.

For clients without mortgage debt, many advisers – according to an AIA spokesperson – are positioning this as an opportunity to redirect the extra disposable income into superannuation, either for the primary client or their spouse.

Weighing the choices

The insurer has also released data for advisers that demonstrates the very low probability (3.6%), that an IP client will:

• Still be on claim at the end of a five-year benefit period
• Not be eligible to claim on their lump sum TPD cover

The decision, then, as to which IP benefit period will best serve the broader interests of the client should come down to the adviser/client conversation based around the client’s particular and unique circumstances/preferences and the prevailing benefit period options available.

This approach is reinforced by South Australian adviser, Vanessa Di Cola, who says that in order to properly serve her clients’ best interests, it’s effectively incumbent on her to make her clients aware of all the choices at their disposal when it comes to IP claim benefit period options.

Di Cola, who works with Adelaide firm, Moore Wealth Advisers, told Riskinfo that, given current economic and cost of living pressures – which she says aren’t going to abate any time soon – her challenge as an adviser lies in finding the right balance or the ‘middle ground’ between a comprehensive IP offer (including a claim benefit period to age 65) and a more cost-effective, lower premium option (ie 2, 5-year benefit periods) that would still deliver appropriate cover, while also freeing additional disposable income that can be used to keep pace with price rises or pay down credit card and/or mortgage debts.

In looking to serve their best interests, Di Cola says she would be doing her clients a dis-service if she didn’t have the conversation with them about all IP benefit period options.

A further perspective has been provided by Life Tech Assist’s David Spiteri, who told Riskinfo he sees this initiative from AIA to be in keeping with the spirit of APRA’s IP intervention and sustainability measures, while at the same time offering a different solution that can also serve the best interests of the client, depending on their circumstances.

There are more nuances associated with this issue, such as the different ways in which TPD cover can be utilised to complement the placement of income protection insurance, and Riskinfo will address these additional areas in subsequent reports.

For this current update being released by AIA Australia, however, which applies from 14 August 2022, the insurer is highlighting for advisers the choices they may want to consider with their clients when it comes to selecting an IP claim benefit period that will best serve their interests, while at the same time enhancing the attractiveness of premium certainty associated with its IP CORE two-year and five-year benefit period options.

Coinciding with the product update, the insurer has simultaneously released a range of advice tools to help facilitate client discussions about the various choices as well as TPD NPV calculators and SoA text.

Click here to access the updated AIA Australia Priority Protection PDS.