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.

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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?

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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.

Insurance premiums are on the rise, and some. Premiums have always increased but this year has been far outside the norm. We take a special interest in Insurance as this is often our clients primary need, we try our best to predict how we can design a protection strategy that will stand the test of time. This is proving difficult this year and we have written about this on a few occasions in the past, if you check previous articles such as this. As always this is not personal financial advice and is written using general information purely for education purposes. So why is this happening and what is the right course of action?

The Background

Since the Banking Royal Commission into banking misconduct many if not all banks have distanced themselves from insurance and investment products and also the financial advice process that distributes these financial Products. CommInsure (one of Australia largest and oldest insurers) has recently been sold to AIA. AMP have sold to Resolution life and no longer offer new polices. Onepath sold to Zurich and Asteron to TAL after TAL itself was purchased by Dai -Ichi life. MLC has moved away from NAB and has been purchased by Nippon life.

During this time we have actually had some new entrants with PPS Mutual and NEOS each offering their own unique solutions based on the long standing direct insurer Nobleoak’s offering. We also had MetLife, a large US based firm, enter the Australian market along with Integrity Life. While there are significant headwinds right now these new companies also have significant advantages. These new insurers have comparatively few clients and therefore can spend more time working on giving new clients a good experience and also, if warranted, can undertake system and process changes that improve efficiency and costs for them and their insured members. Couple that with the fact that clients who have recently joined will have undergone health checks and are unlikely to claim, these younger players are starting from a low base and the only way from here is up.

I do recall an insurance executive saying almost a decade ago that Income protection did not make any money and this was cross subsidized by life cover. The primary goal was to grow market share and insurers jostled for new business each year with better features etc but ultimately low premiums were the primary drivers and first year discounts were more than common.

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Enough is enough - APRA calls it

After taking losses of over $3 billion in Income Protection over the last 5 years APRA stepped in to cancel Agreed value contracts from the end of March 2020. This was just the beginning with further changes in Jan 2021 to mean that insurers need to use industry wide statistics to base their premiums on, not the current stats that they have on their own client books as they do now. This is probably not a huge impact as some will win some will lose but this will go a long way to more uniform pricing which in turn helps to slow down the previous jostling for market share.

The big unknown happens in July 2021. These are still under consultation, but the proposals essentially say that no contracts can be issued that guarantee terms for longer than 5 years and must be re underwritten for occupation and income at that time and reissued with current benefits. They also say that any benefit paid must be offset against any sick or long service leave etc and cannot exceed more than 90% of the previous 12 months income (eg no more agreed value or indemnity 3 year definitions). They will also be basic contracts only so no “plus” or extras contracts that offer free flights home or day 1 payouts for broken bones or sick family members etc etc.

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My premiums were going up well before this year!

This didn’t come out of nowhere. As we mentioned before life and TPD etc often subsidized IP cover. Plus, new business has significantly reduced in the last 2 years due to reduced commissions and increased compliance reducing the incentive for advisers to sell insurance to clients and bring in new money. On top of all of this insurers are required to ensure that they have adequate funds to cover claims in what is called a “statutory fund” which is invested very conservatively as they cannot afford a dip in value and would face a penalty if they became too aggressive in their investment. I am sure anyone with a cash account realises they heady days of a 6% Fixed term deposit are far behind us with the cash rate now at 0.25%. So even before high rates of claims there was less new business and less investment income to contend with.

Overall, premiums this year have increased across the board and much of this is actually driven by reinsurers. Companies such as Swiss Re, Pacific Re, SCOR and RGA etc ultimately dictate what premiums will be in bulk and this is handed down to both retail and group insurers.

There is also a misconception around level premiums that have often been misunderstood or even misrepresented as “locked in”. The reality is that a true level premium means you pay a premium based on your age at the start of the policy rather than your current age every year. So, if you take out a policy at age 28 and hold it for 20 years you will still be paying the premium of a 28 year old when you are 48 and far more likely to claim. Insurers can and do of course increase premiums for 28 year olds from time to time and recent times have been extreme where it may have been a decade since the last significant rerate.

I have compiled a few notes but overall premiums on both level and stepped policies have increased by at least 20% in recent years and by all accounts it’s likely that there is more to come.

Click here for a few notes on specific insurers increases in recent times.

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Enter the Legacy book

Once the above changes take place next year insurers will in all likelihood cordon off these old-style products and move ahead with the next generation of insurance products. This creates what is know as a “legacy product”. An insurance contract that is still active but can no longer accept new entrants.

Over time the policy holders in the legacy book get old and/or sicker and more likely to claim. It is not refreshed by new entrants as they are all entering the current products. The legacy products are “guaranteed renewable” which means that by law contracts cannot be altered to the detriment of the policy holders. The only choice is to increase premiums as more and more claim in this segregated book, these pricing increases then fuel the healthy members who are still able to switch to new products to seek new cover and this whole book snowballs into massive premium increases.

What is the right call?

Put simply, IP insurance contracts will get weaker after this year, you will be less sure that you are well protected. If you are happy to pay more to have a great contract its worthwhile doing it now as even if it’s not agreed value it’s still guaranteed renewable. If you want to be cautious you can take out a policy now and look to replace it with the new generation of policy in a few years once pricing has settled down. It may be that the new policies are still appropriate for you at a fraction of the cost.

If you already have a guaranteed renewable agreed value contract in place it might be worth a little patience as hopping from one provider to the next may mean the premium increases just follow you the following year or 2 (most insurers wont increase for first 2 years on new policies).

As always, it is hard if not impossible to access any financial products without a professional determining whether it is appropriate for your specific needs and circumstances. Speak with a knowledgeable and unconflicted adviser that you trust to give you all the information you need to make an informed decision.

While care has been taken this is not to be relied upon as personalized advice and Shaun Clements and NOR Financial as an authorized representative of Dirigere Advisory has provided this only for education purposes.

Update: If you would really like a deep dive check out this report from Actuaries Institute released last month.

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This financial year is coming to an end and we are having a lot of conversations around “Should we be contributing to Superannuation this year or holding on to cash?”. This is a core question for financial planners and this year is different from many others due to reduced incomes, market conditions and this being the first year you can carry forward unused contributions from last year. All this adds up to a very unique opportunity that we have very little time to take advantage of. Yes, we are in a recession now and this is a cause of concern for many, but markets seem to have almost come back to where they were in Febuary for some bizarre reason and any good adviser will have strategies to manage market volatility.

While we can’t provide the same advice to everyone without knowing their details, we can help you break this problem down yourself so decided to share some key points. If you would like personalised advice, please contact us.

Basic Contribution types and limits

There 2 primary contributions types to Superannuation:

• Concessional Contributions (Deductible - taxed at 15%) - Cap of $25,000pa

• Non Concessional Contributions (not deductible - untaxed) - Cap of $100,000 pa

There are literally hundreds of fine points around superannuation and a good adviser will help you avoid running afoul of these. For the purpose of this exercise we will be looking at using Concessional Contributions to reduce tax. A concessional contribution includes both personal contributions that you pay via salary sacrifice or as a lump sum (which you claim a deduction for) and also the Superannuation Guarantee (SG) payments your employer makes on your behalf.

In simple terms, if you earned $100,000 and made a concessional contribution of $10,000 (which is taxed at 15% inside your fund) your taxable income would be $90,000 and taxed at marginal rates. Easy right? Well there are a few others things to consider.

s293 Tax

If your before tax income is over $250,000 you pay an additional tax of 15% on any contributions. So using the example above if you earned $260,000 in a year and made a contribution of $10,000 you would pay 30% tax inside your fund and then have a taxable income of $250,000. Considering this money would have otherwise been taxed at 45% there is still a 15% tax saving to be made here. Please note that if you are an employee your employer would likely have almost maxed at your cap at this income level with just your 9.5% SG rate.
However, if you made a $25,000 contribution only the first $10,000 would exceed the $250,000 cap and be taxed at 30% with the remainder at only 15%. That’s a tax saving of 30% on $15,000 or $4,500 extra in your super in real dollars. As many of our clients have seen a significant downturn this year many have fallen into the “Goldilocks zone” and are considering maximising contributions while falling just short of the additional 15% S293 tax.

The Catch up rule

Long story short, if you didn’t make use of your contribution cap last year you may be able to use it this year using the carry forward or “catch up”rule.

If you are self employed or a sole trader it’s likely that you can choose when and if you make contributions to super. This is the first year where unused contributions have rolled forward and will continue to do so for 5 years. So if you are a sole trader and made no contribution last financial year you would be able roll this unused cap forward and contribute $50,000 this year and claim a deduction for it. Fast forward to a little over 3 years from now and you could potentially contribute $125,000 and claim a full tax deduction for it. Not bad if you have recently sold a property and have a capital gain or just have money laying about unused.
You can find details of your unused caps on your myGov account but be cautious as it does take time for this to update so the 2019-20 year will unlikely be accurate. This rule also only applies to balances of less than $500,000.

The perfect time is not always during fair weather - Key points

• Will you earn between $180,000 - $250,000 and fall into the “Goldilocks Zone”?

• Have you maxed out your cap this year this and last year?

• Do you have cash or savings that you can lock away until retirement?

So do I or don’t I?

There is an old saying that comes to the forefront during hard times like these “cash is king”. Having money in the bank or in an offset account provides you with a great deal of flexibility. While superannuation is a tax friendly environment and invested funds historically grow at far greater rates than cash or even mortgages it does have the downside of being locked away until retirement. Having accessible savings to build a business, pay off debt or even just pay your bills might not be the most efficient way to allocate your money but it does have significant advantages in flexibility and simply the peace of mind in knowing you have a financial cushion.

This article is designed to help you identify if there is an opportunity and educate you only. If you want a yes or no answer you are more than welcome to contract us for personalised advice that takes into account all of the relevant factors we have considered here plus many more and summarises this in a formal recommendation.