ARTICLE

Better something than nothing

28 February 2023 dot 3 min read

As an adviser, you play an integral role in helping your clients manage both their cash flow and their potential risks. 

With cost-of-living pressures mounting, there is an ever-present risk that a client’s self-owned legacy, or grandfathered, income protection (IP) cover will be sacrificed thereby exposing the family balance sheet to financial strain should a temporary illness-induced absence from gainful employment ensue. 
 
As many advisers will recognise, there are multiple options available to make a legacy IP policy more affordable for clients.  Pulling these policy ‘levers’, should and will often be an appropriate starting point as it preserves the grandfathered status of that legacy IP contract for the client. 

Furthermore, most of these alterations can be implemented without the need to go through underwriting.  That way the client’s most important asset – the ability to produce an income – remains protected and underpinned by an IP contract that has more liberal terms and conditions relative to current on-sale IP policies. 

Pulling Levers

The traditional ways of restructuring IP (while retaining the grandfathered status of a legacy IP policy) to help maintain more affordable premiums include:
 
  • Switching from agreed value to extended indemnity, or indemnity: Some clients may no longer require agreed value IP terms, especially if income is comparatively more stable than when the policy was originally underwritten, say due to stabilisation of recurring business revenue or indeed following a shift out of self-employment to PAYG salaried employee. 
  • Extended waiting period: So long as the client can access, and is willing to “tap into”, liquid sources of capital during the prolonged waiting period.
  • Removal of ancillary benefits and optional extras built into the IP contract
  • Switching from a ‘To Age 65’ to 5-year benefit period.  Statistically, 85% of AIA IP claims are completed within the first 24 months.  For the small cohort of clients remaining on IP claim after 5 years, at least 70% are deemed to be permanently incapacitated based on AIA’s claims experience. The combination of a legacy IP policy on a 5-year benefit period, coupled with lump sum TPD cover, may provide that happy medium for clients seeking ‘fit-for-purpose’ but affordable cover.
The following table outlines the ballpark premium savings as a result of restructuring a legacy grandfathered IP policy:

Option Premium Savings
Change from a to age 65 to a 5-year benefit period 20% - 45%
Change from Agreed Value to Indemnity
15%
Change from a 30 day to a 90-day waiting period
20%-50%
Change from Smoker to Non-smoker
20%
Remove sum insured indexation
up to 5%
Change premium frequency to semi-annual or annual
up to 8%
Remove Claim escalation rider
up to 15%
Remove PLUS optional rider
up to 20%
Remove Advantage optional rider
up to 5%
 
^ Priority Protection Product series 15.5, age bands 35-60, stepped premiums, 30 day waiting period, no Vitality.
 
In addition to restructuring cover, the likelihood of having to actually claim on the IP policy may well be an important consideration, especially if the client is questioning the value of their IP cover.  The following table provides the 2021 AIA Top Five claimable events within the retail IP book, grouped by gender and age band. Notably, 63% of claimants were over 45 years of age when the insurable event occurred.
 
 
IP Claims by age band - 2021

Residual Risks

A recommendation to cancel a legacy IP contract will generally result in the grandfathered treatment being foregone, irrespective of whether a replacement on-sale IP policy is being issued by the existing or an alternative provider.
 
It goes without saying, but a decision to replace an in-force policy with another provider triggers an underwriting process and restarts the duty of disclosure regime accordingly.  Even if a client was a standard life, new loadings may appear particularly if the client’s health status has changed since they were originally underwritten. These risks wouldn’t otherwise present, if retaining the grandfathered legacy IP with the existing provider and merely restructuring to maintain more affordable premiums.  That will often be the appropriate starting point, rather than cancelling or letting the policy lapse altogether.  At the end of the day, having something is better than nothing.

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