Special Communique - 22 September 2021
Why your existing Income Protection insurance is now more valuable than ever…
Back in February this year, in a Special Communique titled, “Why are life insurance policy premiums increasing?”, I outlined industry and regulatory factors that were forcing insurers to increase premiums on a number of products.
I explained that a primary driver of the increases was the December 2019 announcement by the Australian Prudential Regulatory Authority (APRA) of its plan to introduce a range of regulatory measures intended to force insurance companies to change the way they had been pricing many insurance products because the regulator was concerned about sustainability for the future of the life insurance industry.
In short, APRA felt that the premiums being charged for some types of life insurance products were not economically sustainable.
This view was driven by the fact that it had been common practice across the life insurance sector to use Income Protection (IP) products as discounted “loss leaders” to attract new business.
The cost of these products was cross-subsidised by the premiums charged for other kinds of insurance products, such as Life and Total and Permanent Disability cover.
APRA felt this practice of product cross-subsidisation was, along with a variety of other factors, undermining the financial viability of the entire life insurance industry and moved to end it. Thus, insurers are now effectively being to forced charge what the product costs to deliver, resulting in an end to the discounting of IP products relative to their value.
We first flagged these changes to you, our clients, on 20 December 2019 in a Special Communique titled, “Re imminent changes to IP insurance” in which we detailed that the key changes APRA introduced included orders that insurers must:
cease the sale of Agreed Value IP policies by 31 March 2020;
ensure IP benefits do not exceed the policyholder’s income at the time of claim by 1 July 2021;
avoid offering IP policies with fixed terms and conditions of more than five years from 1 July 2021 (later delayed to 1 October 2021); and
ensuring effective controls are in place to manage the risks associated with longer benefit periods from 1 July 2021 (later delayed to 1 October 2021).
Any working Australian needs the financial protection provided by insurance. Accordingly, as part of my own family’s financial risk management plan, I have about half a dozen policies of various kinds, including two Income Protection (IP) policies.
Over the past 12 to 18 months the premiums for each of those policies have increased by 20 to 30 per cent.
Now, setting aside my AFRM Managing Director’s hat for a moment, I’ve got to say my family budget has certainly been impacted by these premium increases, particularly to my IP insurance policies.
My Income Protection insurance policies have level premiums, which have been in force for 15 years. In terms of benefits and definitions, these are some of the most generous IP policies a person can get. Many of my clients have the same policies.
So, when the insurer smashed me with 20 to 30 per cent increases last year, no amount of intellectual awareness of the reasons for these increases – including the knowledge that APRA and the insurance industry itself agree that exceptionally generous IP products have been under-priced in the past and that they have been cross-subsidised by other products – alleviated the initial emotional response triggered when I receive that premium increase notice.
Like any policyholder, my initial emotional response was one of acute annoyance. In a fit of pique, I even sent an email to my insurer complaining about the increases.
Increases of 20 to 30 per cent across six separate policies is a significant financial hit for my family’s monthly budget to absorb.
In a professional forum it would be inappropriate to use the words that best described my mood at the time. Suffice to say I wasn’t a happy man. Well, I was angry, to be honest.
For another example, the other day I received a notice that the premiums on my Business Expenses policy are about to increase by about 25 per cent compared to last year.
So, when I am providing advice to my clients on what are the best insurance options and financial risk management strategies, I really am putting my money where my mouth is.
I am not just talking about it with my clients. I am doing it myself. And I am feeling the financial pain as well.
I got so annoyed at one point I raised the issue with my wife, Gabby, and we discussed if we could continue to pay for all of the insurance policies which together make up my family’s financial risk management plan.
But when we sat down and talked it through and reflected upon why we set up our financial risk management plan in the first place and why we needed it, the flames of my temper pretty much went out.
It was pretty sobering for both of us to think about what our lives could be like if we didn’t have our financial protections in place.
Gabby and I have three little children and bills to pay. And if that catastrophic risk did ever eventuate where I got sick and was unable to work ‒ like what happened to AFRM’s previous Managing Director, Nick Hatherly ‒ I would need that valuable financial protection in place for our family.
The rational part of my mind considered the following facts:
The Income Protection policies cover our family’s biggest financial asset – my ability to earn an income. Now, if I continue to work through to retirement at, say the age of 65, like many people that equates to a significant amount of money earned in total;
The premiums for Income Protection have an associated tax deduction, therefore the increase in premiums is somewhat offset by the fact that I can claim them on my annual tax returns, and;
The limitations and requirements of the new products mean that a claim on the new alternative products in the market will be significantly more complex to achieve a positive outcome compared with the current policies in the market.
Thinking back on all the claims I have managed, when you are unwell and seeking financial support, the last thing you want is uncertainty and complexity when there are bills to pay. That kind of stress hampers recovery.
And at the end of the day, that is why I am sharing my personal journey and thought processes with you.
It is easy to be angry when you receive a premium increase notice and in a fit of pique to say: “Right, I am going to cancel that bloody insurance!”
But – having been there myself – I strongly caution you not to throw the baby out with the bath water and cancel your policy.
The bottom line is that – particularly in the case of Income Protection insurance ‒ any policy that you hold today is a valuable and generous product that can never be reproduced again in the future.
That is, any policies that were in place prior to the range of changes APRA has forced onto IP products over the past year; and even more so from 1 October 2021; are far more generous in terms of the benefits they provide, the definitions and the length of the contract terms on offer than any future products on sale from 1 October 2021.
Certainly, if you hold an Agreed Value IP policy, I urge you to keep it because you will never get a chance to get another one ever again.
The value provided by such policies in terms of generosity of the benefits provided and the relative ease upon which to make a claim make them well worth paying more in premiums to hold onto them into the future. As the name spells out, the benefit is “agreed” and forms the basis for a claim payment.
In contrast, for any new IP policy bought from 1 October 2021, the claim benefit payable is determined by your prior earnings in the previous 12 months.
Bad luck if, say, you are a business owner and your earnings are variable in nature, or you’ve opted for a change in career, had a sabbatical, and your earnings have dropped.
As they say at my daughter’s pre-school: “You get what you get, and you don’t get upset.” That is fine for what ends up on the lunch plate, but here we are talking significant risks to your financial future.
Additionally, many existing IP policies have a broad array of ancillary benefits that can result in much higher benefit payments should you need to make a claim.
From 1 October 2021, any new IP products will simply not offer ANY ancillary benefits.
In short, any new IP products in the market from 1 October will be a significantly watered-down version of those that exist today. Not only will the benefits provided at claim time be less generous, but the claims process itself will become more difficult and onerous, with higher hurdles to overcome in order to have a claim accepted.
And as I have flagged above, because the existing policies provide such greater levels of financial protection and such generous benefits, they will indeed become more expensive.
For example, (to name just two insurers) PPS Mutual and MLC Life Insurance have already flagged a very new world to come in the IP insurance market. PPS has declared it will seek to soften the pain by phasing in IP premium increases over a three-year period from November this year; while MLC has conceded the “sobering reality… that the traditional offers in the market have not been sustainable.”
MLC Life Insurance says it will launch its new range of income protection products on 1 October that will “offer more tailored solutions through greater choice and flexibility.”
However, at the time of writing, it had released no further details of what those products will look like.
But, again, we know that none of the new IP policies will be as generous as those you currently have today.
So, when that renewal notice comes in and you see that significant increase in your premium, we urge you to pause ‒ let the initial emotional response pass ‒ and think with the logical side of your mind.
If it is at all affordable in your family budget, we would counsel you to hold onto your current policy.
The bottom line is that once you cancel a current IP policy, you can never go back. IP policies as generous as those currently in the market will cease to exist from 1 October 2021.
Again, don’t throw your baby out with the bath water.
If you have serious concerns about the ongoing affordability of your cover, reach out to your AFRM adviser. We can potentially do creative things with your existing products to alleviate costs.
Rather than having to buy a new IP policy with inferior benefits, we can perhaps guide you to a middle ground of making amendments to your existing IP products that can provide you with some premium relief.
Unfortunately, there is no silver bullet. There is no magical solution.
In my case, after my temper calmed down and I talked it through with my wife ‒ and I thought about my kids and their future ‒ we made the choice to keep all of my policies just the way they are. I did not make any adjustments.
I kept them all because upon reflection we realised just how valuable our investment in these protections really is to our family’s future.
Managing Director AFRM