The origin story you have all been waiting for - Income Protection - the earliest version of which was created in 1878 and formed the basis for a new kind of mutual. There are some other good nuggets in the article too, at this link.
One of my favourite insurance bloggers tells a story about a customer that said 'why would I need disability insurance when I've never been disabled' - seriously. It goes to show that even with apparently intelligent clients, one should never assume even basic levels of knowledge about insurance. The article is great fun, and a quick read - do read it all.
To judge from quote numbers in packages most advisers choose to start an insurance package with life cover. That choice might be worth exploring in more detail later on - but for now, let's move on and think about what comes next.
The most common addition after life is trauma insurance. In the past trauma has been criticised because, being condition-based, it is possible for a person to suffer a disability and be unable to claim on their trauma. Those folks argue that income protection should be bought first, and trauma afterwards. But trauma advocates have much the same argument: they point out that you can be diagnosed with cancer and not qualify for income protection. Trauma provides options at that point which income protection doesn't.
In a perfect world you would buy both. But budgets are rarely like that.
In total, Trauma is currently quoted twice as frequently as Income Protection. So where it is a straight choice, Trauma is winning.
More interesting is that two thirds of IP (including repayment protection) is sold in combination with Trauma. So there is a significant proportion of cases where advisers are successfully selling both, but when the chips are down, trauma wins. This must mainly be about budget, and some of it is about presentation.
As it is Mental Health Awareness Week in New Zealand here is an interesting article on the insurance perspective of mental health written by Len Elikhis from Sovereign.
'Sovereign’s disability income claims data shows that mental health issues tend to require more recovery time than other health issues. About 50% of mental health claims remain open one year into the claim. This compares with 15% of injury clams and 35% of illness claims.'
Changes to Loss of Earnings and Loss of Earnings Plus effective 8 August are now live on Quotemonster. There were premium changes to LOE and LOE+ and a change in bundled discounts. On Quotemonster the Extras Package has been removed and replaced with Optional Benefits which now includes income top-up package, immediate assist package and a specific injury support. To add or remove the Optional Benefits you will need to go to the 'Settings' screen and make your selection.
There were also a number of changes made to LOE and LOE+. The following items had enhancements:
Rehabilitation and retraining support
Claiming while on LWOP
Claiming while unemployed
These new optional items were also added:
Income top-up package
Immediate assist package
Specific injury support
As a result of these changes scoring variations have been made to the Quality Product Research database. A key point is a reduction in the weighting for TPD benefits which were scored at about a 4% incidence. This reflected the balance of working life risk for a male life from age 40. It has now been weighted to match the policy duration used in the claim model (which is eight years) resulting in a reduction by about two-thirds.
Fidelity life has made a significant cut to first-year premiums for income protection. Against a backdrop of other providers increasing income protection prices the move is aggressive. We are still waiting for confirmation of the subsequent year pricing.
It is likely that we will soon incorporate projections of future prices into Quotemonster as a part of the head-to-head functionality (only available to research subscribers).
The needs analysis beta has already given us some valuable feedback and a package of updates has been put through in the last few days. If you haven't tried the needs analysis feature (also only available to research subscribers) then please do take a look. If you are keen on getting some training on needs analysis please contact us in the office as we are running some workshops focusing on this area over the next few weeks in Auckland and Wellington.
There is a great deal of debate about tax treatment of Income Protection. Given the importance of this product as society progressively shifts towards greater dependence on living benefits from a focus on death benefits this matters. A little while ago I asked the FSC to tell me what their goal in lobbying for consistent tax treatment is. This was their response:
Consistent income tax and GST treatment of income protection products. The income tax treatment is on the current Government work programme with an Officials Issues Paper the likely next step as part of the Government Generic Tax Policy Process (“GTPP”). The TAG will continue to lobby Tax Policy Officials for consistent GST treatment as part of this process also.
So far so good. So I blogged that, and this tax watcher on Twitter said something which shall we say contrasted with the above.
"Review likely but outcome non-taxable non-deductible (AV) taxation. Existing indemnity policies are grandparented" Adding for good measure: "...years away. IRD got bigger projects on; no drive from industry to change tax treatment either"
Back in among the industry on LinkedIn JP Hale had this to say, in this case, he kind of put it differently.
"...the IRD has repeatedly refused to review the position over the years"
It is, of course, perfectly possible that someone is right, and the rest are wrong. But clarity in long-term planning is handy, more so when contemplating a contract which can be hard to switch or change if your health has deteriorated. This is an example of a long-term issue we should be prioritising. Meanwhile, you may find this explanatory video helpful (yes, it is the right video, requires sound, and is suitable for work).
For those advisers that like the idea of a lower, non-taxable, income protection benefit the potential for a review of the taxation of income protection adds risks, or complexity, or both.
For example, if a future review were conducted by Inland Revenue, and the position were changed so that all IP benefits (AV, LOE, or Indemnity) are deductible and taxable then those clients with existing AV benefits may have a problem. If the tax position changes for in-force contracts then they probably need to buy extra cover. A boon, perhaps, to insurers and advisers, but difficult for some clients that have developed health problems in the meantime. Alternatively the change could apply from a certain date forward, adding to the complexity of giving advice to clients with in-force AV contracts which will remain non-deductible and non-taxable. Insurers could make like easier for advisers by allowing a one-off increase to the benefit if it is deemed to be taxable. They are only likely to be tempted to do this if there were better information and enforcement around the taxation of IP benefits.
We continue to hear of complaints that claimants do not declare their income and then discover that they have unpaid tax problems to add to their health issues. Which brings us to the other eventuality: assuming everything becomes non-deductible and non-taxable, then the reverse problem applies. Some may seek to reduce their benefits, a one-off hit to insurers. But the gains to consumers and reduced replacement ratios may be worth it. Each of these costs probably still outweigh the complexity of staying with the current situation.
Zurich have done an international survey and find that people underestimate their personal risk and overestimate the cost of coverage. You can read more and download the full report at this link.
The result: they assume that coverage is not needed and too expensive. There is, of course, a solution. We have to tell them what their risks are and show them that coverage can be cost effective. Because they won't be looking out for it, the message needs to be attractive, positive, and engaging. Moaning about underinsurance doesn't tick any of those boxes. Creating engaging content looks like the better way to go.
This article by Tim Fairbrother on Stuff explains that income protection insurance is very rare even though a person's future income is surely their biggest asset. The article has a few interesting case studies.