Income Protection Stepping-Stone Strategy

With the recent changes to the income protection (IP) market, one question we’re asked regularly by advisers is “how do I manage and discuss IP now?”. A valid question considering the product has experienced changes including having the ‘bells and whistles’ stripped back and reduced replacement ratios.

These changes have meant the gap between someone’s income pre-illness or injury and the reduced replacement ratios, has widened. However, the important conversation to have with your client’s is that an IP policy wasn’t intended to cover an entire income, therefore disincentivising clients to return to work, leading to a greater strain on claims and ultimately larger increases on premiums. IP should remove some of the financial uncertainty whilst your client can’t work, then provide this crutch until they return to work. The conversation about how much and how long is critical to understanding a client’s needs and how to meet these needs in a cost-effective way.

The new products on offer vary with regards to their replacement ratios. At AIA Australia (AIAA), we’ve chosen to begin with a product consisting of 70 percent Pre-Disability Income (PDI) for the first two years, reducing to 60 percent thereafter. While we continue to monitor the market and product designs, we have chosen our replacement ratios based on the APRA and Actuaries Institutes requirements of sustainable products as well as the claims experience. 

AIA Australia (AIAA) has always taken a sustainable approach with our IDII changes, and when we review the benefit, it will always be with this lens to ensure it allows us to keep our claims promise while managing affordability.

The FSC and KMPG released a study in June 2020 which outlined average claim term for IP. On average, the majority of claimants return to work within 12 months, except for cancer (14 months) and mental health disorders (18 months)¹. Our claims experience mirrors these findings, further strengthened by most claimants returning to work within two years, meaning the likelihood of experience the reduction to 60% PDI will be low for the majority of claimants.