Last week AIA Australia launched the first of the new breed of Income Protection products that are designed to meet APRAs guidelines, mandatory from October this year. As a Risk Specialist I’ve been writing about these coming changes for over a year and you can find some of these on my website if you want to nerd out with me. Needless to say I was very excited to see the new AIA PDS and she’s a whopper at 220 pages! I have been getting a lot of requests to write about the upcoming changes in October but until now it would have been “I have no idea what will actually get released, but I doubt it will be better than what you can get now” not really a good basis for a technical comparison. Now that we have some tangible info, it is becoming apparent that these fears were not unfounded but does that mean there is still not good value cover to be purchased?

TLDR?: If you aren’t going to read this do yourself a favour and speak to a professional about getting an income protection policy in place now. They wont get any better. If you have one already, think very carefully about losing or replacing it.

Try not to get your fingers caught as the door on guaranteed renewable IP slams shut in October.

AIA are a long standing insurer in the Asia pacific region and recently grew significantly by merging with Comminsure, after its departure from CBA, which now has them nipping at the heels of TAL as the second largest insurer in the Australian market. AIA have a history of trendsetting and their Vitality program, launched in 2014, was a major innovation that has been used as an example by other insurers on how they might reward policy holders for keeping in good health. Personally, I found the early Qantas flight discount they offered was worth more than my premium. Once again, they have lead the charge in being first to market which leaves them at a disadvantage as competitors will be watching very closely but someone always has to jump first.

AIA Income Protection Core will be available right up until the existing AIA Priority Protection product is closed in October but this is just the first release. It is very likely that this offering will be modified and adjusted in response to feedback and competitors releasing their own unique product. So why is it different? Rather than consider every available policy from every insurer, as I do for my clients, lets just look at the 2 parallel offers AIA have right now.

To Age 65 benefits and 5 year contract terms

This was something that was commonly misunderstood last year as many believed that the 5 year contract renewal actually meant that benefit periods would not exceed 5 years. AIA have not actually applied the 5 year contract term yet but it stands to reason they will by October. Essentially, this means that policy holders do not need to reconfirm occupation and income every 5 years and the contract can not be modified.

Age 65 benefit periods do mean that if you are injured and unable to work at age 30 you could potentially claim a monthly benefit for 35 years but the addition of the changes highlighted below make this significantly less likely.

“Indemnity” definition now 12 months

Since agreed value cover was closed in April last year, AIA have had one of the best definitions in that any insurance benefit can pay up to 75% of your earned income based on the best 12 months in the preceding 3 years. Not bad, even if you take a year off or part time for training or maternity leave you can still wind back the clock to your highest income.
Now the Core product will pay a max of 70% for 2 years and then 60% thereafter of your earned income based on the last 12 months (some scope for 2 years). If you are are in a secure job and your income does not fluctuate this is not necessarily a problem and may still suit you well…but wait there’s more.

Suited occupation

As contained in the AIA PDS A “Suited Occupation” means “an occupation you are reasonably suited to by education, training or experience, including that which has been acquired through occupational rehabilitation programs, re-skilling or employment acquired during the claim period.” this is mostly familiar language as Any occupation TPD used this in the past. However, the addition of reskilling and rehabilitation does worry me significantly. Does this mean you can do another specialization? Or can be retrained to push a broom around a warehouse after ending a promising career in neurosurgery?

Material and substantial duties

This is a new term that has no precedent for how it will be interpreted. Currently, the definition for Disability at AIA is “Unable to perform one or more essential income producing duties of the usual occupation for more than 10 hours p/w.” The Core product will change to “Unable to perform the Material and Substantial Duties of your Own Occupation for initial 24-month Benefit Period and a Suited Occupation thereafter”. This is all up for interpretation but under either definition if you can’t do your job you are covered but now only for a limited time if you can find another suited occupation?

Ancillary benefits (bells and whistles)

No more instant claims before starting the waiting period using specified injury benefits. No death, accident benefits or carers allowances. Income protection was always designed around a monthly benefit being paid to replace income and these type of features were slowly added on to make IP products more attractive. AIA are sticking true to the APRA rules and the name by stripping back to Core benefits and doing away with “plus” or “premier” type packages.

Stepping stones make the way forward far less certain

Stepping Stone approach

Current income protection products cover a very broad spectrum of risks. From a simple broken bone and taking 6 weeks off all the way to being permanently disabled. Advisers like myself aim to ensure that in the event of a serious illness your income is supplemented to cover medical and other expenses on top of your 75% income. This could be a short, medium or even permanent illness or injury. The trouble is that while there might be times where TPD (total and permanent disability), trauma or even death cover is far in excess of your needs as it is often designed to cover a “worst case scenario”. There are often times where full pay-outs are triggered and clients incomes are barely affected. Not common but it does happen.
APRA and now AIA are looking at this as a way to ensure that clients are not claiming more than they need. Now more than ever its important to ensure that you have considered all types of cover and build an insurance “portfolio” rather than let IP cover everything.

No more Level Premiums

AIA are one of the few providers to offer a “true level” premium. Often misunderstood, a level premium sets the base rate of your insurance at the age you started the policy . So it does not increase as you get older and more risky. Essentially this is averaging out the cost of your cover until age 65 or 70 meaning you will be more likely to hold cover longer and therefore have cover when you are older and more likely to claim. Well that’s the idea anyway. Unless you have been very lucky (or have no cover of course) you will have had a premium increase recently, even on level premiums as the base rate has been rising rapidly due to a bevy of reasons we have covered before. One can only guess what the long term strategy is here but essentially this allows AIA to price appropriately year on year rather than try and project what claims and interest rates might be 20 years into the future.

Ok so the terms are not great, but are they good value?

We ran a comparison quote of our typical client, a Doctor age 37, and the result was that the Core product was cheaper by approximately 25%. Not an insignificant saving but “Value” is always down to your unique circumstances. You, with the help of your adviser need to determine if a base level contract like Core, and it’s soon to be released counterparts, still meet your needs. If this was me, a Master Financial Planner and Risk Specialist for my entire adult life, who could all of a sudden not do my job and was told I needed to be retrained to shoot birds at the airport…I’d be wishing I spent the extra 25%.

This article was written with all due care but does not constitute personalised financial advice. You will not be able to access either of these products directly so ensure you deal with appropriately licensed adviser who will take into account your needs, circumstances and any existing cover you might have in place before recommending a solution that is in your best interest. Shaun Clements is the sole director of North of River Financial which is a non institutionally aligned advice practice and has no affiliation with AIA.

October 2021 - Sustainable IP versus Long term benefits