On 1 October, all the life insurance companies who offer retail income protection policies, also known as Individual Disability Income Insurance or IDII, updated their products to comply with APRA’s IDII measures.1

With all the different products and variations in the market, it can be quite confusing to compare the key differentiators between all the new retail income protection products. To help, Dr Jeffrey Scott, Head of Advice Strategy at MetLife Australia, outlines the Top 6 key benefits and features financial advisers need to look out for:

  1. Benefit offsets

    Depending on the retail income protection 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, it is recommended that financial planners familiarise themselves with the differences between each company.

    a. 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, other income replacement insurance payments, 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, or other similar recurrent income.2
     
  2. Replacement ratio

    APRA’s IDII measures stated 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 (say age 60), or after a particular duration on claim (say 2 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  For example:

    Income Tiering         No Income Tiering

    First $240,000 of income            

    70% 70% income replacement ratio     

    $240,001 - $480,000

    40%  

    $480,001 - $960,000

    20%

    $960,000+

    0%
    =$268,000 per annum =$350,000 per annum

    In the above example, if a client 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 70% of their income.

    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 the criteria to an any occupation definition based on the life insured’s education, training, and experience once they have been on claim for a defined period of time (often 2 years).6  This more restrictive total disability definition after a particular duration may restrict claim payments to the life insured, even if they are still incapable of performing their usual occupation.

  5. Sustainability and managing long term benefit payments

    APRA IDII measures stress the importance of managing the risks associated with long-term IDII claims.7 APRA provided a list of recommendations on how insurers could manage claims, but were not prescriptive – instead, they encouraged insurers to explore various options to actively manage the risk, and some of these options are listed below:

    a. Own occupation to any occupation (discussed above)

    b. Reduction in the income replacement ratio (discussed above)

    c. Capability clause: 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.

    d. Rehabilitation and retraining: It’s important that insurers don’t just merely pay retail income protection claims, but actively help return clients 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 duration – reducing the long-term risk to insurers.8
     
  6. Sustainable pricing

    From 1 January 2021, APRA stated that life insurers must utilise industry experience studies that are less than 18 months old. In addition, they also need to conduct their own internal experience study every 12 months.This is to ensure that insurers don’t utilise outdated assumptions when calculating their original premiums, which over the past 6 years has resulted in ad hoc premium increases to retail income protection products of 10%-70% (in addition to normal age related increases and annual indexation.)10

With the numerous changes to retail income protection policies issued from 1 October 2021, financial advisers need to understand both the benefits and restrictions associated with these policies in order to meet their Best Interest Duty to clients.

For more information, speak to your local MetLife BDM

Reference

  1. APRA - Final individual disability income insurance sustainability measures - Wednesday 30 September 2020
  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. 
  4. Actuaries Institute - Reference Product - Individual Disability Income Insurance - Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021
  5. Actuaries Institute - Reference Product - Individual Disability Income Insurance - Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021
  6. Actuaries Institute - Reference Product - Individual Disability Income Insurance - Disability Insurance Taskforce of the Actuaries Institute – Version 1.0 – April 2021
  7. APRA - Final individual disability income insurance sustainability measures - Wednesday 30 September 2020
  8. 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 
    Teledoc Health -Integrated mental healthcare services for vulnerable populations  
    Teledoc Health -THE ACCELERATION OF VIRTUAL CARE: Why solutions that connect the mind and body are critical - By Dr Julia Hoffman
  9. APRA - Final individual disability income insurance sustainability measures - Wednesday 30 September 2020
  10. https://www.afr.com/companies/financial-services/premium-rises-likely-as-life-insurers-lose-1-3b-20201014-p564ydhttps://www.afr.com/companies/financial-services/apra-blasts-unsustainable-life-insurance-practices-20191202-p53g2q; https://www.afr.com/wealth/personal-finance/how-to-reduce-income-protection-costs-as-premiums-soar-20210203-p56z9j