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  • Income Protection Stepping-Stone Strategy

    29 November 2021


    How can a Stepping-Stone Strategy help in discussing income protection with your clients?

    Stepping stone

    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. 

    The argument for our replacement ratios

    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.

    How to manage the IP discussion

    To manage a client’s risk, a Stepping-Stone Strategy could be utilised to create a robust insurance plan and manage premiums.

    This strategy utilises all Risk policies available at different times such as AIAA’s Priority Protection IP CORE, Crisis Recovery (trauma), Crisis Extension, which covers a client for more severe illnesses or injury, Total and Permanent Disablement (TPD) and Life.

    First two years

    In the first two years of claim, a client can use both their IP CORE and Crisis Recovery policies. The Crisis Recovery lump sum payment could offset the reduced IP payment and help manage daily living expenses.

    This strategy could be used where illness or injury is minor and a return to work is likely.

    Two years plus

    Where a claim extends beyond two years, IP payments will reduce to 60 percent. However, with extended or degrading illness or injury, a client may trigger their Crisis Extension and TPD policies which could then be used to supplement their loss of income and pay off debt.

    This strategy allows IP to work at replacing income and enables the other benefits to do the heavy lifting of helping cover debt and cover future earnings lost, while maximising premium efficiencies.

    This strategy could be used where illness or injury is longer than two years with the potential to return to work. If they’re unable to return to work, their cover may have helped reduce or clear their debt, while they are still receiving an income benefit.

    If unfortunately, the client’s circumstances lead to death, they will have their Life Cover in place to provide financial support for their family.

    To learn more about the Stepping-Stone Strategy, click here to read our Technical Position paper.

    Reference:

    1https://home.kpmg/au/en/home/media/press-releases/2020/06/joint-study-reveals-large-rise-life-insurance-claims-costs-22-june-2020.html

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    Copyright © 2021. AIA Group Limited and its subsidiaries or affiliates. All rights reserved. Priority Protection and Priority Protection for Platform Investors products are issued by AIA Australia Limited (ABN 79 004 837 861, AFSL 230043). AIA Vitality, a personalised, science-backed program that supports members every day to make healthier choices, is available with eligible products issued by AIA Australia. AIA Health with AIA Vitality is issued by AIA Health Insurance Pty Ltd ABN 32 611 323 034, a registered private health insurer governed by the Private Health Insurance Act 2007, Private Health Insurance Rules 2007 and the AIA Health Insurance Pty Ltd Fund Rules. The information on this website is current as at 1 April 2021 and may be subject to change. It is general information only and is not intended in any way to be financial, legal, tax, health, medical, nutritional or other advice. You should consider your own personal circumstances and needs and view the relevant product documents, fact sheets, fund rules and terms and conditions before making a decision to acquire such products. If necessary you should obtain professional advice from a financial, tax, medical or health professional. Unless expressly stated, any views or expressions of opinion (including any video content) do not represent the opinion of AIA.
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